This month the Federal Reserve released the Flow of Funds data for the first quarter of 2016. Among the many things contained within the report, the Fed revealed that U.S. household (and non-profit group) net worth rose by $0.84 trillion in Q1 to a total of $88.09 trillion, a nearly 1 percent quarter-over-quarter increase and a new all-time high. Compared to this same period last year, total net worth rose by 2.4 percent, the slowest pace of annual growth since 2011 but net worth is still close to a record high as a share of U.S. gross domestic product (GDP). Growth last quarter was largely driven by real estate, which expanded by $498 billion 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. The large real estate gain helped offset the $160 billion Q1 decline in the value of directly and indirectly held corporate equities, e.g. stocks and mutual funds. The S&P 500 actually posted a 0.77 percent gain in the first quarter but during January and February the benchmark index experienced a significant price correction. Plunging stock values likely scared many Americans out of the market and since they sold near the lows they were not able to benefit from the significant March rebound.
This is yet another example of why retirement investors must focus on the long-term because historically the market has proven to be quite resilient. In fact, the S&P 500 over the last few decades has experienced an average intra-year drawdown of more than 10 percent but the index still posted a positive annual return for 27 of the past 36 years. Moreover, persistent participation in the stock market, along with dollar-cost averaging, can help investors benefit from bull markets and turn large pullbacks into opportunities, in turn better preparing them for a financially secure retirement. Shifting our focus back to the near-term, equities have continued to recover from the panic at the start of the year and apart from this week’s Brexit-related uptick in volatility, major indices are relatively close to record highs. This means that there is a good chance that U.S. households will have seen net worth continue to rise during the second quarter. Further, the labor market has experienced a few setbacks in Q2 but overall job creation has continued along at a relatively healthy clip. As a result, more Americans have likely found jobs which potentially offer access to a 401(k) or similar retirement benefit. Since many people first gain exposure to stocks through an employer-sponsored retirement plan, this continued tightening in the labor market should also be supportive of household net worth growth in the second quarter and beyond.
Sources: FRBG, U.S. BEA, Advisor Perspectives, Calculated Risk, J.P. MorganPost author: Charles Couch