Learning from the Household Net Worth Report
By: Stacey Nickens
The net worth of U.S. households and nonprofits climbed 6.8% between the first and second quarter in 2020. At $118.96 trillion, the net worth of households and nonprofits in the second quarter already exceeded pre-pandemic levels.
Aside from highlighting the economy’s rate of recovery, the Fed’s Flow of Funds report also points to an important lesson about the stock market. When measuring net household worth, the Fed measures net assets minus net liabilities, and the Flow of Funds showed that corporate equities were the hardest hit asset. The value of corporate equities owned by households fell by 25% between the first and second quarter. However, by the time the Flow of Funds report was published, corporate equities had already recouped much of these losses, standing just 8.3% below their end-of-2019 level.
This recovery by corporate equities points to long-term stock market trends. While events, such as the onset of COVID-19, often significantly impact market valuations, these events don’t necessarily have a long-term impact on stock performance. Rather, in the long-run, most securities revert back to performing in accordance with their backing business’s fundamentals. Looking at the rapid recovery of corporate equities between the first and second quarter, I believe you can already see how macroeconomic events don’t necessarily have long-term market impacts, except when they meaningfully impact a business’s fundamentals.
Moreover, those who pulled their money out of the market in March already missed much of the recovery experienced by corporate equities.
All that being said, as we head into a quarter with plenty of stock market noise, I encourage you to consider stock fundamentals over news-related market volatility. If a company is built to weather the storm, they will likely recoup short-term losses. Sitting tight and preparing for long-term investing is thus often the best course of action. As Peter Lynch once wrote, “Stand by your stocks as long as the fundamental story of the company hasn’t changed.”