Soaring Asset Prices, Diminishing Savings Accounts

With stock prices through the roofs and job prospects improving, Americans are finally on an optimistic spending spree. As a result, this is leaving many Americans with less in their savings accounts, taking away from how much they save for retirement.

U.S. household net worth rose from $56 trillion in 2008 to $97 trillion in Q3 of 2017. Economists say it is natural for individuals and families to be spending more money when asset values are increasing. This is called the “wealth effect.” The wealth effect is the premise that when the value of stock portfolios rises due to escalating stock prices, investors feel more comfortable and secure about their wealth, causing them to spend more.

However, when spending is taken too far it can serve as a warning that markets are getting overheated. Previous busts, as we saw in the mid-2000s and the late-1990s, were preceded by periods of rising asset values and extremely low saving.

In December, the U.S. household saving rate dropped to its lowest level since the height of the 2000s housing boom, when many Americans were drawing on rising equity in their homes to spend on vacations, luxury goods, and other consumer discretionary products as opposed to saving. One factor that is different this time around, is that consumers are not spending on debt as aggressively as they used to. With new regulations in place, consumers and investors are less vulnerable should another recession hit the U.S. economy.

According to the U.S. Commerce Department, the saving rate was 2.4% of disposable household income. This is the lowest rate of saving since September 2005. The saving rate had risen to 6.6% when the recession ended in June 2009.

“U.S. consumers are now confident about their employment prospects, see their portfolios and properties increasing in value, and feel that their assets are doing the saving for them” said Keith Knutsson of Integrale Advisors.