Economic Update: Net Worth Increase

The Federal Reserve recently released the Flow of Funds (Z.1) data for the fourth quarter of 2021.

Among the many things contained within the report, the Fed revealed that U.S. household (and non-profit group) net worth rose by $5.3 trillion in Q4 to a total of $150.3 trillion, a 3.7 percent quarter-over-quarter jump and a new all-time high.

Compared to this same period last year total net worth surged by 14.4 percent in Q4, down slightly from the previous quarter’s pace but still the 5th double-digit gain in a row and a big rebound after nearly grinding to a halt in early 2020. The fourth quarter’s gain was in part driven by real estate, which expanded by $1.5 trillion as residential real estate, the biggest asset for many Americans, benefited from home values continuing to appreciate at a rapid rate.

The value of directly and indirectly held corporate equities contributed even more to Q4’s solid gain in net worth by adding $2.5 trillion last quarter, a welcome reversal from Q3’s small decline and unsurprising since the S&P 500 posted its largest gain in a year. More importantly, the equity share as a percentage of total household assets rose again and remained above pre-pandemic levels, signaling that more Americans were benefiting from last year’s bull market and should therefore be less phased by recent volatility. Looking ahead stocks have been under significant pressure at the start of 2022, so another solid gain in household net worth in Q1 may be more challenging to achieve, although home values continued to rise which may help.

Worrying about short-term changes in stock valuations, though, is often unproductive because real wealth creation typically occurs over a much longer time horizon since this allows investors to therefore benefit from decades of growth, via diversified exposure to stocks, and capitalize on the resiliency of the market. One of the best ways to participate is through the use of a 401(k) retirement plan, which provides a variety of tax advantages and in many cases can be augmented by an employer’s matching contributions. Moreover, consistent participation in such a plan, especially when combined with dollar-cost averaging and regularly working with a professional financial advisor, can help investors navigate volatile markets and in some cases even turn large drawdowns into opportunities.

Perhaps more importantly, the sooner one can start saving and investing for retirement the better. This is evidenced by again referring to a J.P. Morgan analysis which estimated that a hypothetical 25-year-old with an income of $50,000 will need to set aside 9 percent of his or her annual pay every year in order to be financially prepared for retirement. The required savings rate jumps to 20 percent if the person waits until age 40 to start setting money aside, and 41 percent if procrastination continues until age 50. For higher income individuals even greater percentages of their income will need to be saved each year if they intend to maintain a retirement lifestyle equivalent to when they were working.

What To Watch This Week:

Monday

  • Nothing significant scheduled

Tuesday

  • 3-Yr Note Settlement
  • 10-Yr Note Settlement
  • 30-Yr Bond Settlement
  • FOMC Meeting Begins
  • PPI-Final Demand 8:30 AM ET
  • Empire State Manufacturing Index 8:30 AM ET

Wednesday

  • MBA Mortgage Applications 7:00 AM ET
  • Retail Sales 8:30 AM ET
  • Import and Export Prices 8:30 AM ET
  • Business Inventories 10:00 AM ET
  • Housing Market Index 10:00 AM ET
  • Atlanta Fed Business Inflation Expectations 10:00 AM ET
  • EIA Petroleum Status Report 10:30 AM ET
  • FOMC Announcement 2:00 PM ET
  • Fed Chair Press Conference 2:30 PM ET

Thursday

  • Housing Starts and Permits 8:30 AM ET
  • Jobless Claims 8:30 AM ET
  • Philadelphia Fed Manufacturing Index 8:30 AM ET
  • Industrial Production 9:15 AM ET
  • EIA Natural Gas Report 10:30 AM ET
  • 10-Yr TIPS Announcement 11:00 AM ET
  • 20-Yr Bond Announcement 11:00 AM ET
  • Fed Balance Sheet 4:30 PM ET

Friday

  • Existing Home Sales 10:00 AM ET
  • Leading Indicators 10:00 AM ET
  • Thomas Barkin Speaks 12:30 PM ET
  • Baker Hughes Rig Count 1:00 PM ET
  • Charles Evans Speaks 2:00 PM ET

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