Is "buy and hold" investing over? Household wealth is down $13.5 trillion this year

As the stock market lost more than 25% of its value over the first three quarters of 2022, American households lost about $6.8 trillion in wealth, according to the Federal Reserve.

Assets fell by $6 trillion in market value and liabilities rose by about $900 billion, resulting in a 4.6% decline in nominal net worth to $143.3 trillion. Most American households' balance sheets were boosted by a 10% increase in home equity, which is their primary source of wealth.

As a result of rapid inflation this year, the loss of real wealth from January through September was about twice as large - $13.5 trillion in current dollars. Inflation reduces the purchasing power of both debts and liabilities.

A decline of 8.6% in real wealth over three quarters is the second-fastest on record (the series began in 1959). Only after the financial crisis of 2008-09 was there a greater drop. (If we had the data, the Great Depression of the 1930s would likely hold the record.)

In the short term, balance sheets look healthy

Despite inflation, real household wealth was about 10% higher in late 2019, just before the COVID-19 pandemic.

In spite of Wall Street losses and the erosion of purchasing power, household balance sheets remained excellent. The wealth share of disposable income (after taxes) fell slightly to 769%, not far from the record 825% in the first quarter.

At $18.8 trillion, liabilities were 103% of annual disposable incomes, much lower than the 136% peak seen in 2008 as the housing bubble burst. Although the economy is much larger now, liabilities are lower than they were back then in real terms.

At the end of September, homeowners were in good financial shape, with equity in their homes reaching a near-record 70.5% of market value from a record low of 46% in 2012. If home prices continue to fall, as they have in recent months, homeowners without much exposure to the stock market will feel poorer. Policy makers and homeowners alike are unsure how mortgage rates will affect home prices.

The process of taking on more debt:

Household debt has also awoken after a 10-year nap, like Rip Van Winkle. Household debt grew at the fastest rate since 2007 in the third quarter, after a decade of no growth in inflation-adjusted terms.

To maintain their living standards, consumers take on debt or dip into their savings. According to this Fed report, personal savings have fallen to 3.7% of disposable income, after averaging more than 10% for the past decade.

The average household still has plenty of cash on hand, however. There are still more than $18 trillion in relatively liquid deposits in bank accounts and money-market funds. The amount is almost enough to pay off every cent of household debt.

In any case, the people who own the debt are not the same as those who own millions in bank accounts.

In its next report, the Fed will provide additional details about the financial accounts, including how assets and liabilities are distributed according to age, race, education level, income, and wealth groups. Due to the pandemic, even Fed economists have questioned the accuracy of those distributional tables.

Take a look at the money:

In today's economy, one of the biggest unknowns is how much savings typical families have to fall back on in hard times. According to one set of assumptions, the typical family in the bottom half of the wealth rankings has about $10,000 in ready cash equivalents. It doesn't make sense to me, considering how many people live paycheck to paycheck. Then again, who knows?

In the coming year, the Fed's Survey of Consumer Finances, which is conducted every three years, may reveal who really holds all that cash.

It's my hope that families will consider becoming active traders. At TradeAlgo, we believe everyone should be empowered with the same type of data as institutions to profit off bear markets.

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