March 17, 2025
Many folks are experiencing a “wealth effect” where they feel rich because the values of their homes and investment portfolios have risen, causing them to spend more. Technically, the “wealth effect” is when spending jumps because assets have increased. But I think these people spend more because they feel richer.
The S&P 500 has gained over 20% in each of the last two years, and households have never had so much of their net worth in stocks. The latest Federal Reserve data indicates households have 43% of their net worth in stocks through 2024’s third quarter.
With total household net worth of almost $160 trillion, that’s nearly $70 trillion in stocks.
The other big component of net worth, home equity, is also hitting record highs. In 2024’s second quarter, household equity totaled $35.3 trillion. While slightly down in the third quarter ($35 trillion), real estate assets are still about 22% of household net worth.
All told, Americans have $104 trillion (roughly 2/3 of their net worth) in stocks and home equity.
The “wealth effect” is fine if you don’t go overboard. But if you’re spending more than you make and borrowing the difference, you’ll eventually face a day of reckoning and need to sell assets to pay off debt.
Consumer spending is hitting record highs. Personal consumption expenditures keep hitting new records and people keep borrowing. Fed data on credit cards and other revolving debt plans shows consumer borrowing is just shy of $1.1 trillion.
Plus, people are saving less as a percentage of their income or tapping into savings because they’re feeling flush. That ignores the future (i.e., paying off debt).
The party that started in 1999 must still be going.