Is the world’s most prosperous nation growing less prosperous?
You bet -- and by trillions of dollars.
According to a new research note from JP Morgan Chase & Co., total U.S. wealth has plummeted by $5 trillion in 2022, down from $13 trillion to $8 trillion, mostly from a sour stock market.
But it’s not just about stocks.
The U.S. economy, as measured by gross domestic product (GDP), slid by 1.4% during the first quarter of 2022, primarily due to high inflation and a massive U.S. trade deficit.
That could have the U.S. careening into recession territory, which the National Bureau of Economic Research cites as a “significant decline in economic activity that is spread across the economy and lasts more than a few months.”
Shades of 1979?
While economic events are dynamic and happen in real-time, where do economists place the current wealth drought from a historical point of view?
“Given the current high rate of inflation and related unique set of geo-economic factors targeting the supply side of the global economy (the pandemic, Russia's invasion of Ukraine, supply chain concerns, and production slowdowns in China), the closest historical comparison would be 1979,” Dr. Krieg Tidemann, a professor of economics at Niagara University, told TheStreet.com. “However, there are limits to this comparison. Even though the 8% rate of inflation is at its several decade's peak, it is considerably below the 22% inflationary peak experienced during the stagflation economy of 1979.”
Unlike 1979, the trillions of dollars lost to Americans in 2022 comes right after a year where homeowners equity was booming and retirement funds were fairly robust. Now, home values are beginning to slide and retirement assets are not far behind, thanks to a declining stock market.
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“When we think of household wealth in the United States, we’re primarily focusing on retirement savings and homeowner equity,” Tidemann said. “Given that home values have generally appreciated through the pandemic period, the recent decline in American wealth is due to the sharp reductions in the value of stocks and other securities.”
Due to the fact that the wealthiest 10% of Americans own 90% of U.S.-owned stocks, the affluent class is absorbing the brunt of the country’s economic woes -- for now.
“Even though the richest Americans have incurred the greatest loss of wealth this year, a plunging stock market still impacts other non-affluent shareholders,” Tidemann noted. “In particular, this loss of wealth is particularly damaging to those near or at retirement age."
"If older Americans have not already converted much of their assets to less risky holdings, the recent stock market downturn may force these Americans to postpone retirement or significantly curtail spending to account for their lost wealth.”
More Like ’94?
Others say that the current wealth-reducing downturn is closer to 1994, when the Alan Greenspan-led Federal Reserve hiked rates eight times with several multi-hikes to ward off inflation.
“Yet the Economy did not officially go into recession and the plane landed softly,” Charles D. Etzweiler, chief research officer at Nepsis, Inc., an investment advisory firm. “Additionally, the calendar years 1995-1999 were five idyllic years for equity investors and rewarded investors for their patience.”
“If this Powell-led Fed can engineer a soft landing we could see a similar set of years following 2022 that reward investors for sticking to their plan,” Etzweiler said.
Moves to Make
While Americans of any age and asset level should discuss any immediate money management moves with a trusted financial advisor, there are some uniform steps investors can take to help mitigate any further damage.
Mitch Martin, chief executive officer at Nashville-Tenn.-based Stonebridge Investment Counsel, LLC, offers three specific portfolio moves to stem the tide and hopefully keep further wealth loss at bay.
Maintain liquidity. “We recommend a cash flow reserve equal to 18 – 24 months of current lifestyle spending as optimal, both economically and behaviorally,” Martin told TheStreet.
Increase allocation to bonds at the short end of the curve. “If the US economy enters a recession, current bond prices have declined to levels that provide an alternative to equities, which should be considered,” Martin added.
Don’t head for the hills. The greatest danger to any investor, Martin said, is being out of the market.
“The liquidity provided by this cash flow strategy helps investors, not the market, to remain in control affording greater peace of mind today and confidence in the future,” he noted.
Martin also cited a favorite wealth creation quote from legendary Fidelity Investments portfolio manager Peter Lynch, who warned of giving declining markets too much respect.
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in corrections themselves,” Lynch said.
As if Americans haven't lost enough money already this year.
