A $5 Trillion ‘Wealth Shock’ Is Cracking Americans’ Nest Eggs

image

(Bloomberg) — The world’s richest nation is waking up to an unpleasant and unfamiliar sensation: It’s getting poorer.

Americans’ collective net worth had been climbing at a dizzying rate for the past two years, even as families and businesses contended with the ravages of Covid-19. Households piled up an extra $38.5 trillion from early 2020 to the end of last year, bringing their collective net worth to a record $142 trillion, the Federal Reserve estimates.

Just as the US is learning to live with the virus and spending shifts back toward pre-pandemic normal, it faces a new scary threat: A plunge in wealth since the start of 2022 that JPMorgan Chase & Co. estimates totals at least $5 trillion — and could reach $9 trillion by year-end.

So far, the richest Americans have borne the brunt, with US billionaire fortunes down almost $800 billion since their peak amid the sharp losses in stocks, crypto and other financial assets. But surging interest rates are also starting to rattle the housing market, where middle- and working-class families have the bulk of their wealth.

It all adds up to the sudden removal of a major prop to confidence: ever-bigger nest eggs. And it’s by design. To stamp out the highest inflation in decades, the Fed needs Americans to curb their spending, even if it requires an economic slowdown to get there.

“It’s painful to get back to normal after really being in a fantasy world last year,” said John Norris, chief economist at Oakworth Capital Bank. “It’s going to feel a lot worse than it actually is.”

Since the start of the year, the S&P 500 Index is down 18%, the Nasdaq 100 has lost 27% and a Bloomberg index of cryptocurrencies has plunged 48%.

That all amounts to “a wealth shock that is set to drag on growth in the coming year,” JPMorgan economists led by Michael Feroli wrote in a note Friday.

Fed Chair Jerome Powell and his colleagues have repeatedly said they’re actively aiming for such a slowdown, leaving it unlikely policy makers will move to address the Great Wealth Drop of 2022.

Billionaires were the biggest winners of 2020 and 2021. Now they’re losing more than almost everyone else. The Bloomberg Billionaires Index, a daily measure of the wealth of the world’s 500 richest people, has dropped $1.6 trillion since its peak in November.

Leading the way are the Americans on the index, who have lost $797 billion since their peak. Perhaps the most humbled by it all is the world’s richest person, Elon Musk. He’s lost $139.1 billion, or 41% of his wealth, since November, when his net worth briefly surpassed $340 billion. Amazon.com Inc. founder Jeff Bezos, the second-richest person, lost $82.7 billion, or 39% of his peak wealth.

While the wealth losses among the top 0.001% reduce inequality, that won’t be much comfort to most people who worry about the U.S.’s widening disparities.

“In a relative sense, it’s going to make the inequity a little lower — but in an absolute sense, everyone suffers,” said Reena Aggarwal, director of Georgetown University’s Psaros Center for Financial Markets and Policy.

Like many, Aggarwal is concerned that falling markets will create problems for the broader economy. “Some correction was needed but this is a pretty huge correction, and it’s not stopping.”

A downturn in housing — made likely by a surge in mortgage rates to the highest since 2009 — threatens wider reverberations. Over the last decade, the robust real estate market added $18 trillion in market value to owner-occupied home valuations.

US spending has been lifted in recent years by owners tapping the enhanced values of their homes for cash. The practice of home equity extraction likely came to a halt this year. More than 40% of refinancings in the final quarter of last year saw homeowners pull cash out of their homes.

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

“Higher home prices and sharply higher mortgage rates have reduced buyer activity,” Lawrence Yun, National Association of Realtors chief economist, said in a statement Thursday. “It looks like more declines are imminent in the upcoming months.”

What Bloomberg’s Economists Say…

While the plunging stock market will dent consumers’ net worth this year, the residual effect of last year’s surge in asset values — and the resilience in home prices so far this year — are major offsetting factors supporting consumption. As a result, personal spending is expected to grow faster this year than before the pandemic, even after the removal of fiscal stimulus.

— Yelena Shulyatyeva, economist

It could take a while before Americans realize that their pandemic home-price gains have evaporated. Even the stock market selloff could take a while to translate into spending in a way that could tip the U.S. into recession.

“A general selloff in the equity market may have a dampening effect,” said Chris Gaffney, president of world markets at TIAA Bank, but there’s a lag for investors. “They look at their statements on a quarterly basis and all of a sudden they say, ‘Oh my goodness, my stock-market portfolio is down 20%, maybe I shouldn’t take that vacation,’ or ‘Maybe I shouldn’t buy that larger TV or a new car.’”

©2022 Bloomberg L.P.

Trending Ideas

Featured Stocks On The Move

Daily Rundown

Top 3 Stocks in Leading Sectors
  • 3 Energy Storage Stocks To Buy Now

    Bloom Energy Corporation (BE) Bloom Energy Corporation designs and manufactures solid oxide fuel cells for on-site power generation. Their Energy Servers provide reliable, resilient, and sustainable energy solutions for various... Read More

  • 3 Steel Product Stocks To Buy Now

    Perma-Pipe International Holdings, Inc. (PPIH) Perma-Pipe International Holdings, Inc. specializes in engineered piping solutions for various industries, including oil and gas, district heating and cooling, and industrial applications. The company... Read More

  • 3 Oil Field Machinery Stocks To Buy Now

    Matrix Service Company (MTRX) Matrix Service Company provides engineering, fabrication, construction, and maintenance services to energy and industrial markets. The company operates through segments such as Storage and Terminal Solutions,... Read More

  • 3 Restaurant Stocks To Buy Now

    Brinker International, Inc. (EAT) Brinker International, Inc. is a leading casual dining restaurant company, operating well-known brands such as Chili’s Grill & Bar and Maggiano’s Little Italy. The company focuses... Read More

  • 3 Coal Stocks To Buy Now

    Natural Resource Partners L.P. (NRP) Natural Resource Partners L.P. is a master limited partnership that owns, manages, and leases a diversified portfolio of mineral properties in the United States. The... Read More

  • 3 Real Estate Developer Stocks To Buy Now

    IRSA Inversiones y Representaciones Sociedad Anónima (IRS) IRSA Inversiones y Representaciones Sociedad Anónima is a leading real estate company in Argentina, engaged in the acquisition, development, and management of diversified... Read More

  • 3 Gas Distribution Stocks To Buy Now

    New Jersey Resources Corporation (NJR) New Jersey Resources Corporation is an energy services holding company that provides regulated natural gas distribution services through its subsidiary, New Jersey Natural Gas. The... Read More

  • 3 Food Product Stocks To Buy Now

    The Chefs’ Warehouse, Inc. (CHEF) The Chefs’ Warehouse, Inc. is a premier distributor of specialty food products, serving high-end restaurants, hotels, and gourmet food stores across the United States and... Read More

  • 3 HVAC Stocks To Buy Now

    Featured Content Lennox International Inc. (LII) Lennox International Inc. is a global leader in energy-efficient climate control solutions, specializing in heating, ventilation, air conditioning, and refrigeration (HVACR) products. The company... Read More

  • 3 Hotel Stocks To Buy Now

    Featured Content Hyatt Hotels Corporation (H) Hyatt Hotels Corporation operates a global portfolio of luxury, full-service, and lifestyle hotels, as well as vacation properties. Known for its premium hospitality offerings,... Read More

  • 3 Tobacco Stocks To Buy Now

    Featured Content Turning Point Brands, Inc. (TPB) Turning Point Brands, Inc. is a consumer products company that manufactures and markets tobacco products and alternative smoking accessories. The company’s portfolio includes... Read More

  • 3 Life Insurance Stocks To Buy Now

    Featured Content F&G Annuities & Life, Inc. (FG) F&G Annuities & Life, Inc. specializes in annuities and life insurance products designed to meet the long-term financial planning needs of clients.... Read More