Today the Federal Reserve Flow of Funds report was released and with it, the latest look at household net worth. Household wealth increased by $2 trillion in the second quarter on the back of higher stock prices and a firming housing market. This was the first gain in net worth since the third quarter of 2007. One of the more insidious features of the past bear market was the vicious negative feedback loop where each leg of lower prices forced more selling, causing net worth to drop to lower and lower levels at a dizzying pace. Not to get too excited, because the year over year look at this series is still quite grim, and the bears will no doubt be focused on the absolute wealth lost and the second derivative nature (less bad, but still negative numbers) of the move on a trend basis.
But I would contend that some of the feedback loop was produced by an increasing lack of confidence, some of which was the double whammy effect of both lower stock and housing prices. Some will say this is old news and already factored into stock prices. But if individuals begin to feel more confident they may just start spending again. And since spending is still the dominant part of US GDP growth, that could be the catalyst for better revenue, earnings, and a pickup in employment, all of which should flow into higher financial asset prices, and then back to even higher net worth. Essentially, if higher net worth leads to improved confidence and more spending, maybe there’s a chance that we are seeing the opposite of the negative feedback loop – which would make it a positive feedback loop, I suppose.
Chart above - Year over Year Change in US Household & Non Profit Net Worth
Source: Bloomberg
