Millionaire U.S. Household Wealth Levels Increase

With Share Prices: Real Estate Lags

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With all the volatility in the stock market and global correlation of markets during periods of crisis investors should ask why they should invest in the stock market. More than a quarter of U.S. employees (27%) said they were ‘not at all confident’ about their ability to afford a comfortable retirement with their 401(k) plans and retirement savings, the highest percentage in two decades, according to an Employee Benefit Research Institute report issued this week.

The answer, at least over longer periods of time, is that the returns to the company shareholder/owners can be substantial. In fact, looking at the distribution of wealth in the U.S. surveys indicate most millionaires made their money from companies they owned which grew in size and profitability – or from shares the owned in companies that grew in size and profitability. 

Wealthy Households Increase

Along these lines this week the Spectrem Group announced that number of U.S. millionaires, those households with assets in excess of $1 million excluding the primary residence, increased by 600,000 in 2010. About 8.4 million American households had assets of $1 million or more at year end, a gain of 8 percent (see chart courtesy Wall Street Journal) The number of millionaires is still below the 2007 high but is making a nice recovery – primarily are a result of the surge in stock market valuations.

wealth population

The number of ultra-high-net-worth households, defined as those with $5 million or more in investable assets excluding the primary residence, also showed a strong increase to 1.1 million. Again, stock market gains fuelled most of the increase. Households in the U.S. number around 115 million according to some estimates.

The Standard & Poor’s 500 Index returned roughly 15% in 2010 and smaller company stocks did much better with small cap indexes up over 25%in many cases, but the value of real estate (in this case second homes, real estate investments and the like) declined in 2010 which limited the gain in the number of wealthy households. The Wall Street Journal indicates that in December the S&P/Case-Shiller index of home values in 20 cities was down 31 percent from its peak in July 2006 (see chart below courtesy Wall Street Journal). For those households whose wealth is concentrated in the real estate sector, versus in the stock market, the household balance sheet repair has been relatively meager over the last 24 months:

americans equity in their homes in trillions

JP Morgan reported in a note this week that the recent drop in stock prices – the S&P 500 fell back to levels very close to start of year figures – will significantly impact household balance sheets. According to their metrics each 100 point drop in the S&P 500 index reduces household wealth by $1 trillion – and reduces consumption by 1.5%. The Nasdaq index was actually down for the year to date. None-the-less if Japan stabilizes JP Morgan sees “the sell-off as creating potentially a very bullish opportunity and maybe the ‘low for the year’".

The Spectrem report noted that millionaires turned bullish on investments for the first time in more than three years, with stocks being the favored investment vehicle. This may result in a positive flow of funds into the equity markets, which can create a positive feedback loop of higher prices and higher flows supporting those prices. Of course, Japan and the Middle East could easily change the outlook.

Fidelity Investments Survey

While Spectrum surveyed household wealth, Fidelity investments surveyed household perceptions as to how much money it takes to feel wealthy in the U.S. They surveyed more than 1,000 households with average investable assets of $3.5 million. Roughly 42 percent of these households claimed they did not consider themselves wealthy according to a study released this week, claiming they would need about $7.5 million to feel rich. The 58 percent of respondents who said they did feel wealthy were younger on average and have a greater number of remaining years in the workforce. 

According to Fidelity there are about 5.5 million U.S. households with at least $1 million in investable assets (not including real estate), or about 5 percent of the population. The discrepancy between the number of millionaires identified by Fidelity (5.5 million) and the number of millionaires identified by Spectrem (8.4 million) appears to be a result of each firm’s definition as to what assets are counted. Millionaires, as defined by Fidelity, control 56 percent of the country’s wealth according to their survey.

Investment Implications

Longer term the trends are clear, regardless of Japan or Middle East issues – the world will use more energy (probably non-nuclear in nature over the next decade) as economies grow. Japan will rebuild, using non-nuclear energy sources and a massive amount of raw materials. Global demand and supply balances will tend to raise energy costs for all participants as well as the costs of basic materials. And energy intensive alternative fuel programs most likely will create bullish trends in the agricultural sector.

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About Joseph Dancy