Investment Contrarians

38.8% Drop in Wealth Hurts the Economy

By for Investment Contrarians |

An interesting new study shows just how much work is needed for market sentiment to change, as consumer confidence remains in a deep hole. Done by the Federal Reserve, the study looked at the median net worth of the average American family. The median net worth dropped from $126,400 in 2007 to $77,300 in 2010, a decline of 38.8%!

For consumer confidence to remain strong, we must have a sense that the wealth accumulated is going up, not down. It’s no wonder the economy has been slow to recover; market sentiment is reflecting the hesitation by the average American to spend in the way they did before. With so much wealth lost, consumer confidence will remain down for some period of time. Millions of Americans certainly don’t feel secure when over 38% of their wealth has been wiped out in just a few short years.

Market sentiment is of course made up of many parts. The stock market has performed very well since the bottom in March 2009. But the magnitude of the drop in household wealth is truly amazing; this appears to be keeping the market from continuing its move upwards. While most of the loss in wealth is associated with the drop in real estate values, the effect this has on consumer confidence cannot be understated. For people who have saved and believed they were doing the “right” thing, it appears this strategy now seems to have backfired. With consumer confidence low, this translates into low confidence amongst business leaders in regards to what they see for the future. This in turn is reflected by fewer jobs being created.

This low level of consumer confidence will also translate into housing prices remaining depressed for much longer. With any increase in housing prices, some homeowners with mortgages that exceed the current value of their homes will take the small price increase and try to sell their property. There’s an unknown number of these potential sellers not reflected in the housing numbers. The market sentiment for housing will continue to be poor until millions of homes are cleared from this inventory.

While there has been some progress in the economy, one can’t simply rebound from a 38.8% drop in a short period of time. This slow progress is also keeping consumer confidence down and will reign over market sentiment for quite some time. With a massive supply of homes still to hit the market, I wouldn’t call this a recovery yet.

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