Last weekend, I suggested that if push comes to shove in the inflation fight, the Fed might need to “torch $30 trillion.”
That was a reference to the accumulated wealth effect versus pre-pandemic levels as measured by the difference between household net worth as it stood at the end of Q3 2022 and Q4 of 2019.
The actual increase over that period was around $26 trillion based on the Q3 figures as originally reported. I wasn’t merely rounding up for the headline I chose. When measured from levels recorded in the immediate aftermath of the March 2020 equity wipeout, the wealth gain through the end of September was more than $32 trillion. So, I just chose $30 trillion as a round number that roughly represented the scope of the surge.
In the linked article, I wrote that despite a rough 2022 for stocks, “the value of corporate equities was still up $10 trillion from March of 2020 through the end of Q3 2022, and given equities’ performance in Q4, that figure is higher now.” On Thursday, the Fed released data for Q4 and in fact, that figure is higher.
After three consecutive quarters of losses, the value of equities rebounded nearly $2.7 trillion during the final three months of 2022, a period during which data, since revised, suggested the Fed was making progress in the inflation fight.
The large gain in the value of equities held by households came despite December’s selloff — had it not been for that, Q4 2022 might’ve been the best quarter since Q4 2020, during the Pfizer rally. As of December 31, 2022, households had $12.9 trillion in “extra” equity wealth versus the end of March 2020.
Overall, household wealth rose almost $3 trillion during Q4, pushing the total accumulated gain since the pandemic lows to $36.7 trillion. Measured against Q4 2019, the total is $30.8 trillion.
As reiterated in these pages time and again, this is a factor in keeping inflation elevated. I’ll leave it to statisticians to explain the nuance of the government’s revision process and thereby the specifics of the upwardly-revised inflation figures for Q4, but I’d gently suggest that if inflation did run hotter than originally thought, it’s probably not a coincidence that the disinflationary momentum stalled just as equities and household wealth rebounded.
Notably, revisions to the real estate series trimmed almost a half trillion from Q3’s originally reported gain, and showed that US property values retreated in Q4 by $96 billion.
Q4 thus marked the first quarter during which the value of real estate fell from the previous quarter since Q1 2012.
Also notable: The new figures suggest that during the pandemic housing frenzy, there were three quarters during which the value of US real estate notched a gain of $2 trillion or more.
During last year’s equity market selloff, still buoyant property prices helped offset some of the declines in stocks for households. In Q4, the stock rally dwarfed the small decline in real estate.
At some point, it may all need to fall simultaneously if the Fed is serious about compelling US households to retrench.
