Corporate balance sheets are in excellent shape, but equally impressive is the Net Worth of the American Household that grows virtually every single quarter year over year. During rare periods when it doesn’t expand, it typically coincides with economic trouble. Historically, more than a 4% decline in sequential quarters is a warning and a year over year contraction in Net Worth has always indicated an economic Recession was imminent.
The chart above highlights the importance of our stock market remaining above the 4th quarter 2018 low in the near term to avoid risk of entering an overall wealth contraction. The current slowing rate of asset growth to +0.8%, falling from a modest peak of less than 9%, may require a deeper wealth contraction below zero to have the same meaning as in past Recessions. The main components of net worth are real estate and investments. Thus contracting individual net worth is historically due primarily to depreciating home values and or stock market declines. In the 2000 to 2001 Tech Bubble implosion the stock market fell nearly 50% while Home values continued to climb at a double digit pace registering a modest overall net worth contraction. More recently the most disastrous wealth contraction since the great Depression occurred in 2008 with another stock market capitulation, but was greatly exacerbated by the rare collapse in real estate (34%). Should our stock market end a quarter in 2019 beneath its nadir of the 4th quarter 2018 we would become more concerned of a wealth panic coinciding with a contracting US economy.
One major cause should such a reversal to new lows occur could be from an escalation of trade wars with China and further declines in gross exports. It’s hard to imagine that China will fail to offer a sufficient solution that risks triggering a severe escalation of the trade warfare, but such a willful policy misstep by Trump and China could lead to at least a modest contraction in our GDP and household wealth.
The stock market rebound this week right back to the highs of 2019 is impressive, as if the market is becoming certain there will be a China Trade Deal signing ceremony announced very soon. If there is a trade agreement, then the Net Worth issue for 2019 will soon be forgotten and green shoots for a new global expansion will become the topic de jour this spring.