This month the Federal Reserve released the Flow of Funds (Z.1) data for the second 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 $1.08 trillion in Q2 to a total of $89.06 trillion, a more than 1 percent quarter-over-quarter increase and a new all-time high. Compared to this same period last year, total net worth rose by 3.1 percent in Q2, an improvement from the first quarter but still one of the slowest paces of annual growth seen during the recovery. Last quarter’s gain was in part driven by real estate, which expanded by $474 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. Mortgage debt as a percent of GDP, though, ended Q2 at 51.8 percent, one of the best readings in more than a decade.
The bulk of last quarter’s gain in household net worth was due to a $750 billion increase in the value of directly and indirectly held corporate equities, e.g. stocks and mutual funds. That represented a welcome turnaround from the moderate decline in Q1 and was obviously helped by the 1.9 percent gain in the benchmark S&P 500 index last quarter. Further, the strong rebound in the market provides another example of how properly diversified exposure to equities 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 even turn large market drawdowns into opportunities. As always, we are here to help with any questions you may have.
Sources: Federal Reserve, ZH, Twitter, WSJ, Reuters, Calculated Risk, Wells Fargo
Post author: Charles CouchDisclosures