Traders work on the floor of the New York Stock Exchange (NYSE) in New York, September 26, 2022.
Brendan McDermid | Reuters
Falling stock markets have wiped out more than $9 trillion in US household wealth, putting more pressure on household budgets and spending.
Americans’ holdings of corporate stocks and mutual funds fell to $33 trillion at the end of the second quarter, down from $42 trillion at the start of the year, according to data from the Federal Reserve. With major market indices dropping further since early July, and the bond market adding more losses, market experts say current wealth losses from financial markets could reach $9.5 trillion to $10 trillion.
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Economists say the declines could soon begin to spread through the economy, adding pressure on Americans’ balance sheets and possibly hurting spending, borrowing and investment. Mark Zandi, chief economist at Moody’s Analytics, said the losses could reduce real GDP growth by about 0.2 percentage points over the next year.
“The loss of equity wealth it has experienced thus far, if it continues, will be a small but significant headwind to consumer spending and economic growth in the coming months,” Zandi said.
The wealthy bear the greatest losses, because they own a huge share of the stock. The top 10% of Americans have lost more than $8 trillion of their fortunes in the stock market this year, which is a 22% drop in their financial fortunes, according to the Federal Reserve. The top 1% lost more than $5 trillion in stock market fortune. 50% of the lower class lost about $70 billion in stock wealth.
The losses represent a massive and surprising reversal for shareholders who have seen record wealth creation from stock surges since the pandemic. From market lows in 2020 to a peak at the end of 2021, US stock wealth nearly doubled, from $22 trillion to $42 trillion. The bulk of that wealth went to those at the top, because the richest 10% of Americans own 89% of individual stocks, according to the Federal Reserve.
With stocks dropping, and those at the top taking the most losses, wealth disparity has fallen slightly this year. The top 1% owned 31% of household wealth at the end of the second quarter, down from 32.3% at the beginning of the year. The share of wealth held by the top 10% fell from 69% to 68%.
While Americans have gained wealth from rising home prices, the gains have been offset by stock market losses. America’s housing wealth rose by $3 trillion in the first half of the year to $41 trillion. The gain is only about a third of the amount lost in the stock market. But with mortgage rates on the rise, Home prices are starting to fall or cool down in many markets.
The drop in stock wealth has also far outpaced the $6 trillion quarterly stock losses during the start of the pandemic in 2020. And while stock markets saw an even bigger drop on a percentage basis, stock losses this year are among the biggest ever on a dollar basis.
The big question is how much lower stocks will affect consumer spending. So far, there is little evidence that wealthy consumers have cut back on their spending. However, some say the “negative wealth effect” – the theory that declining wealth leads to lower spending – could start to emerge soon, especially if the market downturn continues.
Zandi said the loss of stock wealth in the United States could reduce consumer spending by $54 billion next year. But he added that the “financial wealth effect” is less than in the past, because the wealthy hold such a large share of stocks and have large excess savings accumulated during the pandemic.
“Because the savings cushion is so big, they won’t feel compelled to save more as their stock wealth declines,” he said.