The Federal Reserve recently released the updated Flow of Funds (Z.1) data for the fourth quarter of 2017. Among the many things contained within the report, the Fed revealed that U.S. household (and non-profit group) net worth rose by $2.1 trillion in Q4 to a total of $98.7 trillion, a 2.1 percent quarter-over-quarter increase and a new all-time high. Compared to this same period last year, total net worth lifted by 7.8 percent in Q4, up slightly from Q3 and well above the average pace of annual growth seen during the current business cycle. The final quarter of 2017’s big gain in net worth was in part driven by real estate, which expanded by $0.5 trillion as residential real estate, the biggest asset for most Americans, benefited from home values continuing to appreciate faster than the pace of general consumer inflation. Mortgage debt as a percent of GDP, though, still ended Q4 at one of the best levels in more than a decade.
Another driver of Q4’s solid gain in household net worth was the $1.3 trillion jump in the value of directly and indirectly held corporate equities, e.g. stocks and mutual funds. That was one of the largest quarterly increases seen during the current economic expansion but not too surprising considering that the post-election run-up in equities continued throughout 2017. In fact, the benchmark S&P 500 index during the final three months of 2017 posted its best quarterly gain in two years. Looking ahead, though, the stock market has been under pressure recently, so equities might actually wind up being a detractor from household net worth when the Q1 2018 data is released. Regardless, the long-term resiliency of the market is undeniable, and properly diversified exposure to stocks can over time help Americans accumulate significant wealth. One of the best ways to participate in the market 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, combined with dollar-cost averaging, can help investors minimize holding period volatility and sometimes even turn large market drawdowns into opportunities.
Sources: Federal Reserve Board of Governors
Post author: Charles CouchDisclosures