The negative headlines continue and Americans continue to express concern about the future. The U.S. economy and world economies continue to struggle for growth and many households have seen little growth in their paychecks as a result. And while it is understandable that investors are concerned (which is reflected in the recent global stock market declines), there’s another headline which didn’t get nearly as much attention as it deserved.
The Wall Street Journal headline:
Household Wealth Climbs to a Fresh High
How is it possible that the wealth of American households climbed to a new peak in the second quarter of 2015? There are several reasons, but the biggest impact has been the rising real estate values of American homes and the rise of the stock markets.
The net worth of U.S. households and nonprofit organizations which accounts for the value of homes, stocks, bonds and other assets minus all mortgages, debts and other liabilities climbed by $695 billion to a staggering approximately $86 trillion according to the Federal Reserve report issued in early September 2015. That’s right trillion with a “T”. A number that’s so large that it’s hard to actually get a good understanding of its value.
As the U.S. economy recovers from the great recession five years ago, American investors that participated in a soaring stock market and recovering real estate market have increased the collective net worth by $30 trillion over the past five years.
One of the key reasons for this increase in household net worth (besides real estate values) was the participation by Americans in investing in the stock market. As we have said for years, participating in the stock market allows investors to own an investment that has historically grown faster than the inflation rate and has historically allowed investors to increase their net worth.
The key to investing in the stock market – as it has always been – is to ensure that your focus is on the long-term benefits and to disregard the short-term downturns like we are currently experiencing in the stock market.
And while the recent stock market declines will help reduce this net worth, you can see the optimism for the future. One of the main reasons to be optimistic is that household liabilities remain below where they were prior to the recession even while their asset values have skyrocketed. Some data suggests that as a result of this firmer financial footing, American consumers may be more apt to open their wallets.
The size of this households’ net worth is a record 4.8 times higher than the nation’s gross domestic product which is the third time that the ratio has risen above four times. The Federal Reserve report does not adjust for population growth or for inflation, but even after these adjustments, wealth was still at near record levels.
And while it is true that other government agencies such as the Census Bureau have shown that the median household annual income has declined slightly and the poverty rate held steady at a disappointing nearly 15% of Americans, investors should be optimistic that the country’s financial situation should allow for future growth which is necessary to improve both of those conditions.