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A version of this text first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to wealthy investors and consumers. Sign up to receive future issues straight to your inbox.
The wealth of the richest 1% of the population reached a record $44.6 trillion at the end of the fourth quarter, in keeping with recent data from the Federal Reserve, as a year-end rally in stocks boosted their portfolios.
The total net price of the richest 1%, defined by the Fed as those with greater than $11 million in wealth, increased by $2 trillion in the fourth quarter. All profits got here from the shares they owned. The value of corporate stocks and mutual fund holdings held by the top 1% rose to $19.7 trillion from $17.65 trillion in the previous quarter.
While the value of their properties increased barely, the value of their private enterprises decreased, essentially wiping out all other gains aside from stocks.
The quarterly gain was the latest addition to an unprecedented wealth boom that began in 2020 as the market surged amid the Covid-19 pandemic. Since 2020, the wealth of the top 1% has increased by almost $15 trillion, or 49%. Middle-class Americans also saw their wealth increase, with the middle 50-90% of Americans seeing their wealth increase by 50%.
Economists say that a rising stock market further increases consumer spending through the so-called “wealth effect”. When consumers and investors see their stocks rising, they feel more confident in spending money and taking more risks.
“The wealth effect from rising stock prices is a powerful tailwind that has a positive impact on consumer confidence, spending and broader economic growth,” said Mark Zandi, chief economist at Moody’s Analytics. “Of course, this highlights the vulnerability of the economy in the event of a stock market crash. This is not the most likely scenario, but it is a scenario given that the stock appears to be highly(over)valued.”
However, the latest report also highlights that the US stays the largest shareholding. According to the Fed report, the top 10% of Americans own 87% of individual stocks and mutual funds. The top 1% own half of all shares held individually.
Economists say a rising stock market brings huge advantages to the wealthy, mainly by boosting consumer markets and high-end spending. The wealth of middle-class and lower-income Americans depends more on wages and residential values than on stocks.
“Households in the top third of the income distribution and who own the majority of stocks account for about two-thirds of consumer spending,” Zandi said.
Liz Ann Sonders, Chief Investment Strategist at Karol Schwab, these stocks make up an increasing share of the assets of the top 1%. At the end of 2023, stocks accounted for 37.8% of total household assets amongst the top 1%, down from a recent low of 36.5%.
But because the wealthy haven’t got to spend as much of their profits – a phenomenon often called the marginal propensity to devour – Sonders said that additional stock wealth for the 1% may not have a significant impact on the consumer economy.
She noted that consumer confidence amongst people earning greater than $125,000 a yr has “steadily declined” since 2017, in keeping with the Conference Board.
“While rising stock prices may be associated with greater confidence, it does not necessarily mean greater spending on the high-end side,” she said.
WITH S&P500 has already risen by 10% this yr, it is probably going that upper-class wealth may have already reached record levels by the end of 2023. While inequality fell barely in 2021 and 2022 as wages rose and housing prices soared, the wealth gap has since risen returned to pre-pandemic levels.
At the end of the fourth quarter, the top 1% accounted for 30% of the country’s wealth, while the top 10% accounted for 67% of all wealth.
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