When Susan Parish accepted a sales job with Microsoft Corp. in late 1989, she had a clear goal in mind: work hard for a decade, save her money and retire young.
In February 2000, after "an awesome 10 years" with the firm - as it blossomed from upstart to software stalwart - Parish achieved her goal and left the company for a new career as a full-time volunteer.
Today, the former sales representative lives in a small rancher on 6 acres in northern Baltimore County and has two pets - Gertrude the goat and Rufus the donkey. When Parish isn't jogging, swimming, biking, doing yoga or taking dance classes, she does volunteer work for such organizations as the Special Olympics or the Baltimore Zoo.
"Some people can't believe how cheaply I live," says Parish, a very private woman who gives her age as "decades away" from the mandatory retirement age of 65. "Fortunately, the things I like in life happen to be free. The money didn't change who I am. I've never been interested in the things others seem to have - a cool car, a cool house. I just didn't have to have them."
By eschewing such big-ticket toys, Parish dodged the need to cash in chunks of her Microsoft stock, which doubled multiple times during her company tenure. Her Spartan lifestyle helped in another way: When technology stocks plunged and Microsoft fell by two-thirds, Parish wasn't dangerously overextended because she hadn't crafted a budget that counted on yearly capital gains.
In that sense, Parish has a lot in common with Maryland, a state that economists say isn't overly reliant on stock market capital gains. That's a point in Maryland's favor, with the economy now slumping and the once-booming stock market now expected to generate subpar returns for several years to come, according to a recent study.
Thanks to the record stock market gains that preceded the current downturn, consumers and some states got so spoiled by the yearly profits from stocks that they built them into their budgets - figuring this trend would continue.
State governments came to rely on the extra tax revenues from the capital gains realized by consumers and corporations. And numerous consumers, counting on the market to move higher each year, increased their spending and even cashed in some of their winning investments to bolster their binges.
This all has implications in an economic slowdown, however. When an economy sours and a stock market falls far from its high, states and consumers who relied on a capital gains boost to meet their expenses will be overextended and perhaps facing trouble, economists say. That can deepen a downturn, or at least delay a recovery.
Even the Federal Reserve - in a statement accompanying an interest-rate cut last week - noted that the drop in stock market wealth "continues to weigh on the economy."
But Maryland's economy is "more driven by standard sources of future income [such as worker wages] rather than risky sources of future income like those of the stock market," said Pradeep Ganguly, chief economist for the Maryland Department of Business and Economic Development.
While wages are a key factor in the health of the consumer-driven U.S. economy, the stock market has seen its importance move higher in recent years. Households have boosted their stake in stocks - with about half having holdings - meaning that stock prices and consumer confidence are increasingly moving in lockstep. A healthy injection of capital gains from a surging stock market can help accelerate an already strong economy into an actual boom.
This was a factor in what happened in 1999 and the early part of 2000, economists said. As stock prices soared, so did consumer confidence.
Because of the so-called "wealth effect," consumers assumed a rosy financial picture, and spent bigger portions of their paychecks - or went deeper in debt, rationalizing that ever-rising stock prices would do their saving for them. Consumers increasingly took advantage of the bull market by cashing in, or "realizing," a portion of their gains, giving them still more money to spend and adding further juice to the record-length boom.
A recent study of the impact of capital gains in the Regional Financial Review underscored this trend: Nationwide, realized capital gains rose from about $164 billion in 1995 to an estimated $550 billion last year.
"By cashing in on their stock portfolios, not only are consumers saving less and spending more [of their wages], they actually have more cash to spend," said Mark A. Zandi, chief economist for Economy.com in West Chester, Pa., and a co-author of the Regional Financial Review study.
A majority of analysts predict slower growth in stock prices over the next few years, which will likely yield lower levels of capital gains. Nationally, from an estimated $536.1 billion in 1999 and $550 billion last year, investors are projected to net capital gains of $367.7 billion this year and $313.3 billion in 2002, the study concluded.
On the state level, however, there are significant variations in capital gains realizations. While capital gains netted in Maryland totaled roughly $10 billion last year, 15 states reaped larger stock market windfalls, the study found. The top three: California ($76.8 billion), New York ($52.8 billion) and Florida ($48.4 billion).
Those numbers alone cannot conclusively show whether a state is too reliant on capital gains, said DBED's Ganguly. For extra perspective, it's worth looking at just how concentrated those gains are - that is, to take each state's share of the capital gains pie and compare it with that state's share of the overall U.S. population, Ganguly said.
For instance, the estimated $10 billion in capital gains realized by Maryland investors last year represented about 1.8 percent of the $550 billion in estimated gains netted nationwide. Since Maryland's population of about 5.2 million people is 1.9 percent of the U.S. population of nearly 273 million, having 1.8 percent of the capital gains with 1.9 percent of the population doesn't indicate an overdependence, Ganguly contends. The upshot: Maryland consumers will feel the pinch of a lackluster stock market a lot less than consumers in states where capital gains play a larger role.
For a comparison, consider the three states that netted the largest capital gains: California, New York and Florida. All three appear more reliant on capital gains, Ganguly concluded.
California has 12.15 percent of the population, but had 13.96 percent of the capital gains. New York had 6.67 percent of the population, but 9.6 percent of the capital gains. And while Florida had 5.54 percent of the population, it reaped 8.8 percent of the capital gains, Ganguly said.
There are reasons for the disparity between these three states and Maryland, experts say. As the home of Silicon Valley, California is host to scores of long-established high-tech firms - and to countless high-tech millionaires. Within New York state is New York City, home to Wall Street, the venerable New York Stock Exchange, and the very investment banks and brokerage houses whose prime directive is to create capital gains. And Florida is a mecca for retirees, many of them drawing down on the capital gains they spent their lives amassing.
In Maryland, large parts of the labor force work either for service businesses or the federal government - both reasonably stable, but known neither for issuing stock nor for handing out stock options. Nor is the state home to many corporate headquarters, the place in any company where stock ownership is most concentrated.
And though its nascent biotechnology and telecommunications-technology sectors hold promise, the youth of these sectors and the general pullback in stock prices have so far kept them from creating widespread wealth.
On the other hand, Maryland has the highest median household income and lowest poverty rate of any state, according to the U.S. Census. At least for now, that means the state's fortunes are tied more to the health of the overall economy than to currently volatile stock prices, experts say.
"Here it's not the wealth effect, it's the economy effect," said David L. Berman, head of the Berman Financial Group LLC, a financial planning firm based in Timonium.
"As long as people still have jobs, and are making money, we are going to be fine."
Several Maryland consumers echoed that view - even those with stock market investments. Just as the big jump in stock prices two years ago didn't cause them to open the spending spigot, neither did the subsequent sell-off induce them to pull the plug on planned purchases.
"It did not change anything," said William Yerman, 36, a real estate title attorney and father of three with a home near Hunt Valley who works as an executive vice president of the Fountainhead Title Group in Columbia. "It really didn't have an effect on me at all."
Landon Royals, 38, a Baltimore man who owns and operates Royals Insulation Inc. in Anne Arundel County, said he and his family have ignored the stock market's gyrations and adhered to their long-term financial plan.
To prove his point, Royals said that he and his wife last year sold the house they lived in near Pikesville and bought an older but larger house near Loyola College that needed some work, but held great promise.
While Royals said the family's investments in stock and real estate had enjoyed some big gains the year before, he noted that they bought the new house in late July - when the Dow Jones industrial average and Nasdaq composite indexes remained well off their highs.
"It just was time for us to upgrade," Royals said. The earlier profits, and subsequent sell-off, "did not affect our views at all."
For Parish, the early retiree from Microsoft, that sell-off is a constant reminder to keep living within her means, especially since the outlook for stocks is the most uncertain it's been in years. She's better diversified than before, and has avoided the big-ticket temptations that have landed others in tight spots. That won't happen to her, she vows.
"Thankfully, I'm happy and comfortable with my modest lifestyle," Parish said.
"I haven't accumulated a lot of expensive 'toys.' I expect that, if I had, I'd have been in pain now. Fortunately, I didn't."