Is Wealth Creation Skipping Some Generations?
The Federal Reserve’s wealth effect is perhaps the worst-kept secret in finance. Over the past several years, the central bank injected record amounts of liquidity into the financial system with hopes of stabilizing banks and forcing investors into riskier assets. The idea is that an economic recovery will form as higher asset prices cause more people to feel confident and spend money. This strategy has worked to some degree, as long as you’re significantly invested in stocks or real estate.
A sharp rebound in the equity and housing markets sent household wealth in the United States to an all-time high last year. The net worth of American households and nonprofit organizations grew $10 trillion to $80.7 trillion in 2013, up 14 percent from the prior year, according to the Federal Reserve. The value of stocks and mutual funds accounted for more than half of the gain at $5.6 trillion, while home values contributed $2.3 trillion. In comparison, Americans’ wealth previously peaked at $68.8 trillion in the second quarter of 2007.
All three major U.S. indexes gave a record performance in 2013. The Dow Jones Industrial Average jumped 26.5 percent to post its best year since 1995, while the S&P 500 surged nearly 30 percent to log its biggest annual gain since 1997. In fact, the S&P 500 finished 2013 at a record high, which has only happened 11 times since 1927. The Nasdaq gained 38 percent to return to levels not seen since the dotcom bubble.
Unfortunately, many Americans have not benefitted from the rising stock market. Gallup’s latest annual Economy and Finance survey found that only 52 percent of Americans are either personally — or along with a spouse — invested in stocks. That is the worst reading since Gallup began the survey in 1998, and 13 percent lower than the peak of 65 percent made in 2007. Only 37 percent of U.S. investors believe the stock market is an “excellent” or “good” strategy for average Americans to grow their assets.
The housing recovery is also escaping many Americans as young families have only recovered about one-third of their wealth lost during the financial crisis. According to a recent analysis by the Federal Reserve Bank of St. Louis, the average inflation-adjusted wealth of a family headed by someone under 40 was about $108,000 at the end of the third quarter of 2013, compared to $691,000 for a family headed by someone between 40 and 61. As the chart below shows, older families have mostly recovered the net worth lost from the recession, but younger families still have another 30 percent to recover.
“The main reason young families’ balance-sheet recovery lags is the recent housing crash and its lingering effects,” explained the Federal Reserve. “The homeownership rate among younger families has plunged, reflecting both the loss of many homes through foreclosure or other distressed sales and delayed entry into homeownership among newly formed households. The house-price gains that have helped mainly older families to rebuild homeowners’ equity have been overshadowed among younger families by the ongoing retreat from homeownership.”
While the Great Recession technically ended in the summer of 2009 as the economy rebounded and started to expand, the aftershocks will be felt for many years to come. After peaking in 2004 at 69 percent, the national homeownership rate has declined for nine consecutive years. Younger families logged the biggest fall and are not in any rush to return to housing. Between 2005 and 2013, the homeownership rate among young families plunged from 50.1 percent to 42.2 percent.
Younger generations such as the Millennials are also shying away from the stock market. Cash accounts for 52 percent of the average Millennial’s portfolio, compared to only 23 percent for other investors, according to a recent report from UBS Wealth Management. Millennials believe saving is the best option for their money, and only 12 percent said they would invest found money in the market. Holding some cash can provide an opportunity for future investments, but making it the foundation of an investment portfolio is dangerous over the long haul.
“Millennials seem to be permanently-scarred by the 2008 financial crisis,” said Emily Pachuta, Head of Investor Insights, UBS Wealth Management Americas. “They have a Depression Era mindset largely because they experienced market volatility and job security issues very early in their careers, or watched their parents experience them, and it has had a significant impact on their attitudes and behaviors.”
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