Over $9 trillion in wealth from American households have been simply wiped off by dropping stock prices which has piled on additional pressure on balance sheets and expenditure of families.
According to Federal Reserve data, American holdings of corporate stocks and mutual fund shares decreased to $33 trillion at the end of the second quarter from $42 trillion at the beginning of the year. The current wealth losses from financial markets could total $9.5 trillion to $10 trillion, according to market experts, as major market indexes have fallen even more since early July and the bond market has added additional losses.
According to economists, the drops could soon begin to spread throughout the economy, putting pressure on Americans’ balance sheets and potentially harming their ability to spend, borrow, and invest.
According to Moody’s Analytics Chief Economist Mark Zandi, the losses could hold back real GDP growth by close to 0.2 percentage points in the upcoming year.
“The loss of stock wealth suffered to date, if sustained, will be a small, but meaningful headwind to consumer spending and economic growth in coming months,” Zandi said.
Since they own a disproportionate amount of stocks, the wealthy are suffering the greatest losses. The Federal Reserve estimates that the wealth of the top 10 per cewnt of Americans has decreased by 22 per cent this year, or over $8 trillion, due to stock market losses. Over $5 trillion in stock market wealth has been lost by the top 1 per cent. The stock wealth of the bottom 50 per cent has decreased by about $70 billion.
For shareholders who have witnessed record wealth creation from surging stocks since the pandemic, the losses represent a significant and abrupt reversal. America’s stock wealth increased from $22 trillion to $42 trillion, nearly doubling between the market lows in 2020 and the peak at the end of 2021.
According to the Federal Reserve, the wealthiest 10 per cent of Americans own 89 per cent of the stocks that are privately held, meaning that the majority of that wealth went to them.
Wealth inequality has slightly decreased this year as a result of declining stock prices, with those at the top bearing the majority of the losses. At the end of the second quarter, the top 1 per cent owned 31 per cent of the country’s household wealth, down from 32.3 per cent at the start of the year. The top 10 per cent’s portion of wealth decreased from 69 per cent to 68 per cent.
Although the increase in housing prices has made Americans wealthier, the benefits have been more than offset by stock market setbacks. In the first half of the year, America’s housing wealth increased by $3 trillion to $41 trillion.
The gain only makes up about a third of the stock market losses. Nevertheless, home prices have started to fall or cool in many markets as a result of rising mortgage rates.
The decline in stock value also outpaces the $6 trillion in quarterly stock losses that occurred at the start of the pandemic in 2020 by a considerable margin. Although there have been bigger percentage drops in stock markets, this year’s stock losses are among the biggest ever in terms of dollars.
How much the stock declines will affect consumer spending is the key question. There aren’t many indications that wealthy consumers are cutting back on purchases as of yet.
However, some claim that the “negative wealth effect”—the idea that spending declines when wealth declines—could soon begin to have an impact, particularly if market declines persist.
According to Zandi, lost stock wealth in the United States could cause a $54 billion drop in consumer spending in the upcoming year. He continued, however, that because the wealthy own such a large percentage of stocks and have “substantial excess saving built up during the pandemic,” the “stock-wealth effect” is less pronounced than in the past.
“Since their saving cushion is so large, they won’t feel as compelled to save more given the decline in their stock wealth,” he said.
(Adapted from CNBC.com)