A $ 5 trillion ‘wealth shock’ is breaking the eggs of Americans

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

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The combined net worth of Americans has been rising at an alarming rate for the past two years, even as families and businesses struggled with the Covid-19 disaster. According to Federal Reserve estimates, households accumulated an additional $ 38.5 trillion from the beginning of 2020 to the end of last year, bringing their combined net worth to a record $ 142 trillion.

As the United States learns to live with the virus and spending pre-epidemic returns to normal, it faces a new alarming threat: a sinking of assets since the beginning of 2022 that JPMorgan Chase & Co. Estimates total – 5 trillion – and could reach $ 9 trillion by the end of the year.

Among the sharpest losses in stocks, cryptocurrencies and other financial assets so far, the richest Americans have suffered losses, while the fortunes of U.S. billionaires have fallen by nearly $ 800 billion. But rising interest rates have also begun to push the housing market, where the middle and working families have the lion’s share of wealth.

It all adds up to the sudden removal of a major prop for confidence: the ever-larger nesting egg. And by design. In order to reduce inflation to the highest level in decades, the Fed needs Americans to reduce their spending, even if the economic downturn is needed to get there.

John Norris, chief economist at Oakworth Capital Bank, said: “It’s actually going to feel a lot worse than that.”

Since the beginning of the year, the S&P 500 has lost 18%, the Nasdaq 100 has lost 27%, and a Bloomberg index of cryptocurrencies has lost 48%.

It’s all “an asset push that will lead to growth in the coming year,” Jeep Morgan economists, led by Michael Ferroli, wrote in a note on Friday.

Fed Chair Jerome Powell and his colleagues have repeatedly said that they are actively watching for such a recession, leaving it unlikely that policymakers will move forward to tackle the Great Wealth Drop by 2022.

Read more: Fed to plow ahead of half-point hikes, stock recession not hampered

Billionaires were the biggest winners of 2020 and 2021. Now they are losing more than almost everyone. The Bloomberg Billionaires Index, a daily measure of the wealth of the world’s 500 richest people, fell শীর্ 1.6 trillion from the top in November.

The index is led by Americans, who lost $ 797 billion from their top. Perhaps the most humble by this is the richest man in the world, Elon Musk. It has lost $ 139.1 billion, or 41% of its assets, since November, when its total value briefly exceeded 340 billion. Amazon.com Inc. founder Jeff Bezos, the second richest man, lost% 82.7 billion, or 39% of his fortune.

Although the loss of assets in the top 0.001% reduces inequality, it will not be very comforting for most people who are concerned about widespread inequality in the United States.

“In a relative sense, it’s going to reduce inequality a bit – but in a real sense, everyone is suffering,” said Reena Agarwal, director of Georgetown University’s Passers Center for Financial Markets and Policy.

Like many, Agarwal worries that market downturns will create problems for the wider economy. “Some corrections were needed but it’s a pretty huge fix, and it doesn’t stop there.”

The housing crisis – the highest increase in mortgage rates since 2009 – threatens a wider response. Over the past decade, the powerful real estate market has added $ 18 trillion to market value in owner-occupied home appraisals.

In recent years, owners have been tapping into increasing the value of their homes for cash to cover US costs. The practice of home equity liquidation has probably stopped this year. The last quarter of last year saw more than 40% refinancing, with homeowners withdrawing cash from their homes.

Real estate is much more evenly distributed than financial assets. According to Federal Reserve estimates, the top 1% owns more than half of U.S. stocks and mutual funds, and the bottom 90% owns less than 12%. In contrast, the bottom 90% in real estate owns more than half of the total, while the top 1% is less than 14%.

“High home prices and sharply high mortgage rates have reduced buyer activity,” Lawrence Eun, chief economist at the National Association of Realtors, said in a statement on Thursday. “It looks like a further fall in the coming months.”

What Bloomberg economists say …

Although the sinking stock market will lower consumer net worth this year, the remaining effects of last year’s uptick on asset prices – and the resilience of home prices so far this year – are the main offsetting factors supporting consumption. As a result, personal spending is expected to grow faster this year than ever before, despite the removal of financial stimulus.

– Yelena Shulyatieva, economist

For the full note, click here

It may take some time for Americans to realize that their epidemic has evaporated home-value gains. Even stock market sales can take some time to translate into costs that could push the United States into recession.

Chris Gaffney, president of global markets at TIAA Bank, said: “General sales in the equity market may have a narrowing effect, but there is a setback for investors. “They look at their statements on a quarterly basis and suddenly 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 big TV or a new car.’ ‘

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