American households have hit a new record high in net worth, a trend fueled by the stock market’s gains and rising home values. According to the Federal Reserve, by the third quarter of 2024, household net worth had increased by $4.8 trillion, bringing it just shy of $169 trillion.
Despite the dramatic increase in wealth, this boost in household net worth isn’t necessarily translating into improved consumer sentiment. Many Americans are still feeling uncertain, and consumer confidence remains fairly low. However, experts believe this surge in household wealth is one reason Americans are continuing to spend.
The Wealth Effect: How Rising Wealth Fuels Spending
The concept of the wealth effect explains how rising asset values, such as home prices and stock market performance, influence consumer behavior. As the value of assets like homes and investment portfolios increase, households tend to feel wealthier and more confident in their financial situation, which encourages them to spend more.
Eric Freedman, Chief Investment Officer at U.S. Bank, notes the ongoing trend: “We have had this gradual, consistent increase in both home prices as well as the stock market that’s led to people spending more money. And the cycle continues.”
Stock Market Gains: A Disproportionate Windfall for the Wealthy
While household wealth has grown overall, the gains have not been equally distributed. The top 10% of wealthiest Americans hold about 92% of all equity in the stock market. This means that the wealthiest individuals have reaped most of the benefits of stock market growth.
Sam Stovall, Chief Investment Strategist at CFRA Research, highlights the broader reach of stock ownership today compared to decades ago: “Stock ownership certainly is much more broad today than it was 20, 40 years ago because there are 401(k)s.” These retirement plans have allowed more Americans, particularly middle-income households, to participate in the market and benefit from the rising stock prices.
Potential Risks: Overspending and Debt
While the increase in household wealth has contributed to sustained consumer spending, it’s not without risks. Experts caution that consumers may become overly reliant on the paper profits generated by rising stock prices and home values, which could lead to overspending.
Tuan Nguyen, economist at consulting firm RSM, points out that credit card debt has hit new record highs in recent quarters. “It is true that credit card debt hit a new record high in recent quarters. But so did household assets, total income, because of the labor market and the stock market,” he explains.
Despite this, Nguyen notes that the debt-to-assets ratio for Americans is currently near a multidecade low, suggesting that households overall are in a relatively strong financial position. This makes it easier for Americans to continue spending without the same level of concern about affordability.
The Divide: Low-Income Americans Struggle More
However, the benefits of rising household wealth have not been evenly distributed. Lower-income Americans, who own fewer assets, are facing a growing debt burden, particularly from credit cards. These households are falling further behind as they rely more heavily on credit to finance their purchases.
In contrast, wealthier households—who own the majority of the stock market and real estate assets—are likely to be better insulated from the risks of rising debt and financial stress.
Conclusion: A Mixed Picture for American Consumers
While rising household wealth, driven by stock and real estate gains, has fueled consumer spending and bolstered the economy, this growth is not felt equally across all income levels. The wealth effect continues to drive consumption, but for many Americans, particularly those in the lower-income brackets, rising debt is becoming a significant concern. As long as asset prices continue to rise, spending may remain robust, but any downturn in the stock market or real estate values could lead to financial strain for those who are already financially vulnerable.
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