While everyone was focused on the political circus in Washington DC last week, a little tidbit of news went largely ignored by the American public. According to the Federal Reserve’s latest Q1 statistical release, Americans are the wealthiest that they have ever been. [i]
Although American wealth has been steadily climbing for nearly fifty years, experiencing only a few small hiccups along the way, this Federal Reserve report is noteworthy for a few reasons. [ii]
First, it signifies a significant percentage jump in household net worth in comparison to prior periods.
In fact, year-over-year gains increased by 8.3 percent, representing the strongest gains in three years. From the prior quarter alone, wealth climbed to $2.3 trillion, or 10.5 percent. [iii]
Second, much of the gain is coming from financial assets rather than from real estate assets. This is a bit of a surprise, given how profitable the real estate market has been in recent years. [iii]
To obtain a bit more context, compare the $24.8 trillion in real estate during Q4 2015 to the $20.5 trillion invested in equities and mutual fund shares during the same period. Roll forward to Q1 2017, and you can see that equities and mutual fund shares have grown to $23.8 trillion; an increase of $3.3 trillion. Comparatively, real estate has only grown by $2.1 trillion. Additionally, then compare that $2.1 trillion growth in real estate to the overall growth in financial assets of $5.9 trillion ($71.2 trillion to $77.1 trillion). [iii]
The importance of financial assets relative to real assets (e.g. real estate and durable goods) is reflected in the balance sheet below. [iv]
When comparing the growth in financial assets from Q4 2015 to now, you only have to look at the S&P 500 or the NASDAQ to get a quick picture of what has been driving this growth. [v]
If you break the financial assets growth down further, you will see that much of this growth has been concentrated in a few large stocks; in particular, Apple, Facebook, Amazon, Netflix, and Google. [vi]
A few takeaways from all this data are as follows:
- Growing wealth generally supports consumer confidence and spending
- We may be less susceptible to a negative wealth effect if we have another housing correction
- The concentration of a few companies driving equity index prices higher creates a new kind of concentration risk as it relates to our current personal balance sheet
- We may be much more vulnerable to the impact of a prolonged equity correction when it lasts longer than average [vii]
Finally, the following chart shows that our current balance sheet risk is a bit more diversified than you may think. The vast majority of the current wealth created by the stock market only goes to a very small percentage of people. [viii]
Although we would all like better distribution of wealth, the good news is that the bottom 90 percent of consumers drives most of our consumption. In fact, a prolonged equity correction may not derail their consumer habits as much as it would derail the top 1 percent. A real estate correction, however, is another story, though we did just live through one.
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Tim Phillips, CEO, Phillips & Company
Robert Dinelli, Investment Analyst, Phillips & Company
v. Bloomberg LP
vi. Google Finance