A $5 trillion ‘wealth shock’ breaks Americans’ nest eggs

(Bloomberg) — The world’s richest country is waking up to an unpleasant and unfamiliar feeling: it’s getting poorer.

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Americans’ collective net worth has been rising at an astonishing rate over the past two years, even as families and businesses grappled with the ravages of COVID-19. Households accumulated an additional $38.5 trillion from early 2020 to the end of last year, taking their collective net worth to a record $142 trillion, the Federal Reserve estimates.

Just as the United States learns to live with the virus and spending shifts back toward pre-pandemic normality, it faces a new frightening threat: the decline in wealth since the start of 2022 that JPMorgan Chase & Co estimates to total at least $5 trillion — and could reach 9 trillion dollars by the end of the year.

So far, the brunt has been borne by the richest Americans, as the fortunes of American billionaires have fallen by nearly $800 billion since their peak amid sharp losses in stocks, cryptocurrencies and other financial assets. But high interest rates are also starting to wreak havoc on the housing market, with middle- and working-class families owning the bulk of their wealth.

All this adds up to the sudden removal of a major pillar of confidence: an ever-larger nest egg. It is by design. To stem the highest inflation in decades, the Fed needs Americans to rein in their spending, even if it takes an economic slowdown to get there.

“It hurts to go back to normal after being really in a fantasy world last year,” said John Norris, chief economist at Oakworth Capital Bank. “It will feel much worse than it actually is.”

Since the start of the year, the S&P 500 is down 18%, the Nasdaq 100 is down 27%, and the Bloomberg Crypto is down 48%.

All of this amounts to a “wealth shock set to weigh on growth next year,” JPMorgan economists led by Michael Feroli wrote in a note on Friday.

Federal Reserve Chairman Jerome Powell and his colleagues have repeatedly said that they are actively targeting such a slowdown, making it unlikely that policymakers will move to address the large wealth decline of 2022.

Read more: Fed advances half a point higher, unhampered by equities slump

Billionaires were the biggest winners in 2020 and 2021. And now they’re losing more than just about anyone else. The Bloomberg Billionaires Index, a daily measure of the wealth of the world’s 500 richest people, has fallen by $1.6 trillion since its peak in November.

Americans lead the index, who have lost $797 billion since their peak. Perhaps the most humble of all is the richest person in the world, Elon Musk. He has lost $139.1 billion, or 41% of his fortune, since November, when his net worth briefly exceeded $340 billion. Amazon.com founder Jeff Bezos, the second richest person, has lost $82.7 billion, or 39% of his peak wealth.

While wealth losses among the top 0.001% reduce inequality, that will be uncomfortable for most people who worry about widening inequality in the United States.

“In a relative sense, you will reduce inequality a little bit — but in an absolute sense, everyone suffers,” said Rina Agarwal, director of the Psarros Center for Markets and Financial Policy at Georgetown University.

Like many, Aggarwal is concerned that bear markets will create problems for the broader economy. “Some correction was required but this is a pretty huge correction, and it doesn’t stop.”

The contraction in the housing sector – likely due to the rise in mortgage rates to their highest levels since 2009 – threatens to reverberate further. Over the past decade, the robust real estate market has added $18 trillion in market value to owner-occupied home valuations.

Spending in the United States has been ramped up in recent years with landlords taking advantage of the enhanced values ​​of their homes for money. It is likely that the practice of extracting home ownership has ceased this year. More than 40% of refinancing in the last quarter of last year saw homeowners withdraw money from their homes.

Real estate is distributed much more evenly than financial wealth. The top 1% own more than half of US holdings of stocks and mutual funds, and the bottom 90% own less than 12%, according to Federal Reserve estimates. By contrast, in real estate, the bottom 90% own more than half of the total, while the top 1% own less than 14%.

“High home prices and sharply higher mortgage rates have reduced buyer activity,” Lawrence Yun, chief economist for the National Association of Realtors, said in a statement Thursday. “It appears that more declines are imminent in the coming months.”

What the economists at Bloomberg say…

While a plunging stock market will weigh on consumers’ net wealth this year, the lingering effect of last year’s surge in asset values ​​— and the resilience of home prices so far this year — are key equalizing factors supporting consumption. As a result, personal spending is expected to grow faster this year than it did before the pandemic, even after fiscal stimulus has been removed.

– Yelena Shulyateva, economist

For the full note, click here

It may be a while before Americans realize their pandemic gains in home prices have evaporated. Even a stock market sell-off can take some time to translate into spending in a way that could push the US into recession.

“The general sell-off in the stock market could have a mitigating effect,” said Chris Gaffney, head of global markets at TIAA, but there is a lag for investors. “They look at their data on a quarterly basis and all of a sudden they say, ‘Oh my God, my stock market portfolio is down 20%, I probably shouldn’t take that vacation,’ or ‘Maybe I shouldn’t buy a bigger TV or a new car. “

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