Why the US is experiencing the ‘Great $5tn Wealth Drop’ in 2022

The richest Americans who recorded outsized wealth gains are now bearing the brunt as stocks and cryptocurrencies post sharp losses

Surging interest rates are starting to rattle the US housing market, where middle- and working-class families have the bulk of their wealth. Getty
Powered by automated translation

The world’s richest nation is waking up to an unpleasant and unfamiliar sensation: it’s getting poorer.

Americans’ collective net worth had been climbing at a dizzying rate for the past two years, even as families and businesses contended with the ravages of the coronavirus pandemic. Households piled up an extra $38.5 trillion from early 2020 to the end of last year, bringing their collective net worth to a record $142tn, the Federal Reserve estimates.

Just as the US is learning to live with the virus and spending shifts back towards pre-pandemic levels, it faces a new threat: a plunge in wealth since the start of 2022 that JP Morgan Chase estimates totals at least $5tn — and could reach $9tn by the end of the year.

So far, the richest Americans have borne the brunt, with US billionaire fortunes down almost $800 billion since their peak amid the sharp losses in stocks, cryptocurrencies and other financial assets.

But surging interest rates are also starting to rattle the housing market, where middle- and working-class families have the bulk of their wealth.

It all adds up to the sudden removal of a major prop to confidence, ever-bigger nest eggs. And it’s by design.

To stamp out the highest inflation in decades, the Fed needs Americans to curb their spending, even if it requires an economic slowdown to get there.

“It’s painful to get back to normal after really being in a fantasy world last year,” says John Norris, chief economist at Oakworth Capital Bank. “It’s going to feel a lot worse than it actually is.”

Since the start of the year, the S&P 500 Index is down 18 per cent, the Nasdaq 100 has lost 27 per cent, and a Bloomberg index of cryptocurrencies has plunged 48 per cent.

Americans grapple with the highest inflation in decades

Americans grapple with the highest inflation in decades

That all amounts to “a wealth shock that is set to drag on growth in the coming year”, JP Morgan economists led by Michael Feroli wrote in a note.

“While the plunging stock market will dent consumers’ net worth this year, the residual effect of last year’s surge in asset values — and the resilience in home prices so far this year — are major offsetting factors supporting consumption,” says Yelena Shulyatyeva, a Bloomberg economist.

“As a result, personal spending is expected to grow faster this year than before the pandemic, even after the removal of fiscal stimulus.”

Fed chairman Jerome Powell and his colleagues have repeatedly said they are aiming for a slowdown, leaving it unlikely policymakers will move to address the Great Wealth Drop of 2022.

Billionaires were the biggest winners of 2020 and 2021. Now they’re losing more than almost everyone else. The Bloomberg Billionaires Index, a daily measure of the wealth of the world’s 500 richest people, has dropped $1.6tn since its peak in November.

Leading the way are the Americans on the index, who have lost $797bn since their peak.

Perhaps the most humbled by it all is the world’s richest person, Elon Musk. He’s lost $139.1bn, or 41 per cent of his wealth, since November, when his net worth briefly surpassed $340bn. Amazon founder Jeff Bezos, the second-richest person, lost $82.7bn, or 39 per cent of his peak wealth.

While the wealth losses among the top 0.001 per cent reduce inequality, that will not be much comfort to most people who worry about the US’s widening disparities.

“In a relative sense, it’s going to make the inequity a little lower — but in an absolute sense, everyone suffers,” says Reena Aggarwal, director of Georgetown University’s Psaros Centre for Financial Markets and Policy.

Like many, Ms Aggarwal is concerned that falling markets will create problems for the broader economy.

“Some correction was needed but this is a pretty huge correction, and it’s not stopping,” she says.

A downturn in housing — made likely by a surge in mortgage rates to the highest since 2009 — threatens wider reverberations. Over the past decade, the robust real estate market added $18tn in market value to owner-occupied home valuations.

US spending has been lifted in recent years by owners tapping the enhanced values of their homes for cash. The practice of home equity extraction is likely to have come to a halt this year.

More than 40 per cent of refinancings in the final quarter of last year involved homeowners pulling cash out of their homes.

Real estate is far more evenly distributed than financial wealth. The top 1 per cent owns more than half of US holdings of stocks and mutual funds, and the bottom 90 per cent owns less than 12 per cent, according to Federal Reserve estimates.

By contrast, in real estate the bottom 90 per cent owns more than half of the total, while the top 1 per cent holds less than 14 per cent.

“Higher home prices and sharply higher mortgage rates have reduced buyer activity,” Lawrence Yun, National Association of Realtors chief economist, says. “It looks like more declines are imminent in the coming months.”

It could take a while before Americans realise that their pandemic home-price gains have evaporated. Even the stock market sell-off could take a while to translate into spending in a way that could tip the US into recession.

“A general sell-off in the equity market may have a dampening effect,” says Chris Gaffney, president of world markets at TIAA Bank, but there is a lag for investors.

“They look at their statements on a quarterly basis and all of a sudden they say, ‘Oh my goodness, my stock market portfolio is down 20 per cent, maybe I shouldn’t take that vacation,’ or ‘Maybe I shouldn’t buy that larger TV or a new car’.”

Updated: June 02, 2022, 8:56 AM