There is a lot we don't know about the wealth effect. Economists can only estimate its macroeconomic effects. Other economists go as high as 7 cents per dollar. Then there's the question of how long it takes for consumers and companies to shift their buying and investing habits in response to fluctuations in stocks. The maximum effect of changes in equity prices occurs after four to five quarters.
People take a while to adjust their consumption patterns.
They don't realize the gains of losses immediately. Than Gains Soothe Hatzius adds, however, that a decline in the stock market might feed into the real economy sooner than a rise would. Simply because researchers have found consumer confidence to be more sensitive to declines in stocks than to rallies. Slight changes in consumer spending and investment can, of course, make big differences to GDP growth. They have a multiplier effect on the overall economy.