what this means is economic growth should strengthen during bull markets and erode in bear markets 
special considerationsat first glance the notion that the wealth effect spurs personal consumption makes sense it is reasonable to assume that anyone sitting on huge gains from a house or stock portfolio would be more inclined to splash out on an expensive holiday new car or other discretionary items nevertheless critics claim that increasing asset wealth should have a much smaller impact on consumer spending than other factors such as tax household expenses and employment trends why because a gain in the value of an investor s portfolio does not actually equate to higher disposable income initially stock market gains must be considered unrealized an unrealized gain is a profit that exists on paper but that has yet to be sold in return for cash the same applies to rocketing property prices example of the wealth effectproponents of the wealth effect can point to several occasions when significant interest rate and tax increases during bull markets failed to put the brakes on consumer spending events in 1968 offer a good example taxes were hiked by 10 yet people continued to spend more even though disposable income declined because of the additional tax burden wealth continued to grow as the stock market persistently climbed higher criticism of the wealth effectstill there is considerable debate among market pundits about whether or not the wealth effect truly exists especially within the context of the stock market some believe the effect has more to do with correlation and not causation proposing that increased spending leads to asset appreciation not the other way around there is also a school of thought that promotes the pigou effect theory here when prices fall individuals gain purchasing power and raise consumption rates which leads to higher employment rates housing vs stock market wealth effectwhile it has yet to be definitively connected there is more robust evidence linking increased spending to higher home values economic luminaries karl case and robert shiller the developers of the case shiller home price indices together with john quigley set out to research the wealth effect theory by compiling data from 1982 to 1999 the results presented in a paper titled comparing wealth effects the stock market versus the housing market found at best weak evidence of a stock market wealth effect but strong evidence that variations in housing market wealth have important effects upon consumption the authors later extended their study of wealth and consumer spending in a panel of u s states to an expanded 37 year period from 1975 to the second quarter of 2012 the results released in january 2013 revealed that an increase in housing wealth similar to the rise between 2001 and 2005 would boost household spending by a total of about 4 3 over the four years in contrast a fall in housing wealth comparable to the crash between 2005 and 2009 would cause a spending drop of roughly 3 5 several other economists have supported claims that an increase in housing wealth encourages extra spending however others dispute these theories and claim that previous research on the topic has been overstated 