I think it’s safe to say we’ve been enjoying a good year for stocks. Year-to-date, the S&P 500 is up about 19%. This follows two previous years of strong market returns. In 2020, the market finished up 16%, and 2019 was even better, climbing 29%. In spite of political change in Washington and a global pandemic, the market has continued to move higher.
This market growth has also contributed to a sharp tick higher in household net worth. According to JP Morgan Chase, U.S. household net worth now sits at $144.5 trillion.
Digging Into the Numbers
If we look back prior to the Great Recession of 2007-2009, that figure stood at about $70 trillion, so we’ve seen a doubling over the last 14 years. If we dig a little deeper into these numbers, there have been some interesting developments over the years.
Consumer debt was a concern leading into the Great Recession. If we look back to the fourth quarter of 2007, right before the housing and market meltdown, consumer debt payments as a percentage of disposable income sat at about 13.2%. At the end of the third quarter of 2021, for example, that figure now sits at 8.5%. What has contributed to the shrinking of household debt service payments?
There are likely a few factors. First, as a result of the financial crisis, the Federal Reserve has helped by dropping rates to all-time lows. And rates have essentially stayed low for the past 14 years, allowing consumers to refinance their debt to lower rates.
Also, consumers learned some hard lessons from the financial crisis and have been less inclined to rack up debt. Banks have also been more selective in making loans, given they’ve been burned by borrowers not being able to make their payments. All of this is a positive for the health of the U.S. consumer.
Strong Household Wealth
Strong market returns contribute to the continued climb in household wealth as well as an increase in home values across the country, especially the last few years. As of the end of the second quarter, homes accounted for about 25% of consumer assets while investments and pensions were a little over 60%. Assets in total for the U.S. consumer came in at about $159 trillion.
Looking at the other end of the balance sheet, liabilities were a little under $18 trillion with mortgages accounting for 65% of all consumer debt. This really isn’t much of a surprise given that most of us need loans for homes, cars and college. So while not all consumers may have benefitted from the strong markets and low rates, as a nation the consumer is certainly better off than they’ve been before.
Despite the Challenges
There are likely a number of reasons why some may not have fully participated in the strong market returns over the past three years. To start, it has been well documented that investors tend to be their own worst enemies when it comes to building wealth in the market. If we look back over the 20-year period from 2001 to 2020, we would see that even with the lost decade for the stock market from 2001 to 2010, the S&P 500 annualized return over this 20-year period was 7.5%
Unfortunately, according to a Dalbar study, the average investor’s rate of return over that same period was only 2.9%. Even worse, inflation averaged 2.1% over this same period. Why such a sharp contrast between the market and the average investor? Well, investing is an emotional exercise. Investors can fall victim to emotional decision making during periods of extreme lows and highs that turn out to be wrong, resulting in permanent damage to their wealth. This can be seen when you look over what are called “fund flows.”
Fund flows show where people are investing their money. I mentioned earlier we have experienced a strong stock market for almost three years. But with the exception of 2021, investors pulled billions of dollars out of stock funds. For example, in 2019, $51 billion was removed from stock funds, and 2020 was even worse with a draw of $236 billion.
Granted, early 2020 was a scary time and certainly the catalyst for the large outflows of stocks. Where did most of this money seem to go? Taxable bonds and cash saw the biggest inflows in these two years.
Buy High, Sell Low?
Another potential stumbling block for investors is investing when the market is at an all-time high. We all like to feel like we’re getting a deal, but buying when it’s high wouldn’t feel like we were. I’ve heard Jayme Meredith say in a meeting, “Time IN the market is more important than TIM-ING the market.” And the data supports this thinking.
Since 1988, if you invested when the S&P 500 was at a new high, the average return one-year later was 15%. Three years later, it was 49.9%. Five years later, it was 79.2%. These are impressive returns. The potential stumbling block that periodically comes up usually every four years is politics.
What we’ve seen since 1949, regardless of who has controlled the White House and Congress, is the market has trended higher. The average return for Republican-controlled Washington (which has only happened 11% of the time) has been 12.9%.
For a Democratic-controlled Washington it has been 9.8%. Split government, which is most common at 62% of the time, was 7.9%. Those are all very good returns.
So when it comes to investing, focus on the fundamentals, like corporate earnings, and try to avoid making decisions when emotions are high.