USA | Oct 1, 2022

US$9 trillion wiped out from Americans’ wealth

/ Our Today

U.S. dollar banknote in front of stock graph is seen in this illustration taken, June 12, 2022. (Photo: REUTERS/Dado Ruvic/Illustration)

Falling stock markets in the United States have wiped out more than US$9 trillion in wealth from American households.

This latest state of affairs is putting more pressure on family balance sheets and spending. Americans’ holdings of corporate equities and mutual fund shares fell to US$33 trillion at the end of the second quarter, down from US$42 trillion at the start of the year, according to new data from the Federal Reserve.

With major market indexes falling even further since early July, and the bond market adding further losses, CNBC is reporting that market experts are saying the current wealth losses from financial markets could total US$9.5 trillion to US $10 trillion.

Economists say the drops could soon start rippling through the economy, thus adding pressure to Americans’ balance sheets and possibly hurting spending, borrowing and investing. Mark Zandi, chief economist of Moody’s Analytics told CNBC that the losses could reduce real GDP growth by nearly 0.2 percentage points over the coming year.

Declining stock wealth

“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. The wealthy are bearing the largest losses since they own an outsize share of stocks.

A trader works on the trading floor at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., September 13, 2022. (Photo: REUTERS/Andrew Kelly)

The Federal Reserve is reporting that the top 10 per cent of Americans have lost over US$8 trillion in stock market wealth this year, which marks a 22 per cent decline in their stock wealth. The top one per cent has lost over US$5 trillion in stock market wealth.

The bottom 50 per cent have lost about US$70 billion in stock wealth. The losses mark a massive and sudden reversal for shareholders who saw record wealth creation from soaring stocks since the pandemic.

From the market lows of 2020 to the peak at the end of 2021, America’s stock wealth nearly doubled, from US$22 trillion to US$42 trillion. According to the Federal Reserve, as reported by CNBC, the bulk of that wealth went to those at the top, since the wealthiest 10 per cent of Americans own 89 per cent of individually held stocks.

With stocks declining, and with those at the top bearing most of the losses, wealth inequality has fallen slightly this year. The top one per cent owned 31 per cent of the nation’s household wealth at the end of the second quarter, down from 32.3 per cent at the beginning of the year. The share of wealth held by the top 10 per cent slipped one percentage point to 68 per cent.

Impact on housing

While Americans have gained wealth from rising housing prices, the gains have been more than offset by stock market losses. America’s housing wealth rose by US$3 trillion in the first half of the year to US$41 trillion.

The gain is only about a third of the amount lost in the stock market. Yet with rising mortgage rates, home prices have started to decline or cool in many markets. The drop in stock wealth also far exceeds the US$6 trillion in quarterly stock losses during the beginning of the pandemic in 2020.

Real estate signs advertise new homes for sale in multiple new developments in York County, South Carolina. Photo taken February 29, 2020. (File photo: REUTERS/Lucas Jackson)

While stock markets have seen larger drops on a percentage basis, this year’s stock losses are among the largest ever on a dollar basis. The big question is how much the stock declines will impact consumer spending.

So far, there are few signs that affluent consumers have cut their spending. Yet some say the “negative wealth effect ” the theory that wealth declines lead to spending declines could soon start to bite, especially if market declines continue.

Zandi argues that lost stock wealth in the US could reduce consumer spending by US$54 billion in the coming year.