The Dow's Role in Making You $1.5 Trillion Richer in 2014

The Dow Jones Industrials (DJINDICES: ^DJI  ) jumped almost 99 points on Thursday, joining the S&P 500 (SNPINDEX: ^GSPC  ) at a new record high, and showing the continuing strength of the U.S. stock market overall. Indeed, the stock market has played a vital role in boosting the net worth of the U.S. population, according to a Federal Reserve report released today. Let's take a closer look at the report and how it likely affected your finances.


Federal Reserve building. Source: Dan Smith.

Getting richer
The Fed's statistical release on the Financial Accounts of the U.S. provides an upper-level picture of how the economy is doing in terms of creating wealth. As of the end of the first quarter, total household net worth rose to almost $81.8 trillion, up almost $1.5 trillion from the end of 2013. As impressive as that pace appears, it actually represents a slowdown from 2013's growth rate, with net worth soaring by more than $9.4 trillion during the four quarters of last year.

What's interesting, though, is what the source of that greater wealth was. The value of corporate equities and mutual fund shares jumped by a total of $361 billion, which equates to roughly a quarter of the overall increase so far in 2014. Yet, as we saw during the housing boom, real-estate values played a much more important role in the rise of household net worth, with a jump of about $750 billion representing fully half of the overall gain in American wealth.

One of the more interesting things about the Fed data is what the report says about asset allocation among American households. Real estate makes up about a quarter of overall assets, with outstanding mortgages reducing net investment in real estate to about 15%. Among financial assets, deposits make up about 15%, credit-market securities like bonds amount to less than 10%, and stocks and mutual funds add up to about a third. The remainder is included in the present value of expected pension payments and in direct investments in businesses like sole proprietorships and partnerships.

If nothing else, the Fed report puts some perspective on the role that stock market investments have on the overall wealth of the American people. As important as movements in the Dow Jones Industrials are to investors, what happens with home prices has a far bigger impact on the net worth of millions of Americans with little or no money invested in stocks or mutual funds. As a result, even if you count yourself among the investing class, you shouldn't forget that the vast swath of Americans pay little attention to the activity of the Dow Jones Industrials in their own financial lives.

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  • Report this Comment On June 06, 2014, at 4:28 AM, mrskeptic914 wrote:

    I am not an economist and don't pretend to be, but I have enough common sense to know that you cannot create lasting, real wealth out of thin air--the preferred method of the Federal Reserve. In David A.Stockman's book, The Great Deformation, Chapter 17, "Serial Bubbles", and in other chapters, he argues that the wealth creation of the stock market has been directly proportional to the creation of fiat money. But he is not alone in arguing this point, and I have seen charts tracking "quantitative easing" (a euphemism for stealing from our grandchildren) and stock market increases.They run along the same footpath. According to Stockman, there was a decline in the value of household stocks and mutual funds from $13 trillion to $7.4 trillion by the end of 2002. The printing presses were shifted into fifth gear thus driving interests rates down and encouraging speculative investments--same as today. The S & P shot up to 1560 in Oct. 2007. We all know what happened in 2008 when the S & P dropped from its high to 675 in 2009. Equity wealth plunged from $14 trillion to $9 trillion virtually overnight, thus another $5 trillion decrease in household equity "wealth". The balloon filled with hot air popped.

    Again, I don't claim to be an economist, and I only understand about 10% of Stockman's book, but what goes up without a substantial improvement in the American economy must eventually come down. During the 12 year Greenspan Fed, household investments in equities rose from $2 trillion to $13 trillion, a rate of 17.5 % compared to a GDP growth of 5.7 %. Can someone explain to me--and this is an honest question--how the DOW and S & P can truly reflect reality when, in Stockman's words, "that wealth can grow permanently at three times the rate of national output growth is not plausible"?

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