The S&P 500 and U.S. Household Wealth Have Reached Record Highs
We’ve done it again. Despite our own stupidity, and constant attempts to trip ourselves up with in-fighting, at this exact moment, by nearly every conceivable economic metric, the United States has the largest group of individual people enjoying a higher standard of living, more total wealth, longer median lifespans, and more free time than any other civilization that has ever existed, at any point in recorded human history. There has never been a point when life is better than it right now. You’re living it. I feel like we should go get a cake or something.
What is driving this shower of prosperity? Two things:
- The most widely watched gauge of the U.S. stock markets1, the S&P 500, closed at an all-time high yesterday, driven by ever-rising profits and dividends.
- The newest economic data showing household net worth for individual families in the United States now stands at record-shattering aggregate $74.8 trillion, leading to some speculation that we might be seeing the end of the deleveraging process (families strengthening their balance sheets by paying down debt and building savings).
The numbers are very good, aside from a few, small quibbles I have with the way they are being reported. (An example: You can’t just take the aggregate net worth of the nation’s households, you must adjust them for changes in the population. In this case, the distinction isn’t very large as there wasn’t a significant population shift during the interim reporting period. Nonetheless, it should have been done. Also, there should be a purchasing power adjustment to factor in variables such as inflation or widespread changes in the market values of commodities caused by supply/demand considerations. Again, neither would have had much influence on the final numbers in this particular case due to the deflationary pressures of deleveraging over the past few years mitigating cost levels, but its still good form to provide the data. Otherwise, if you fall out of the habit, you set yourself up to suffer from what famed economist Irving Fisher wrote about in The Money Illusion almost a century ago, in which nominal changes in the unit of measurement (in this case, the dollar) obfuscate the underlying reality of what is happening with the real-world, lived economy.)
Particularly worthy of excitement is that this isn’t based on an valuation bubble (for that, look the bond market, which terrifies me; though I think it could ease itself out given the rolling-nature of bond maturities so that, if interest rate increases are done intelligently over 5-7 years, the typical investor might not have a clue what was averted). The S&P 500 is currently trading at an estimated 14.6 times next year’s earnings. It’s not cheap, but it’s not particularly expensive, either. For the number crunchers out there, grab the most recent FACTSET on the index (PDF); the profits are gushing out of nearly every part of the economy. Could stocks crash by 50% tomorrow? Yes, that is the nature of equity ownership; it happens every few decades. If they do, though, it won’t be because they were overvalued, it will be because of some systematic shock or panic. We’re a far cry away from the crazy days of the late 1990s when blue chip giants were valued at 50 or 70x earnings.
An obvious danger to all of this joy and affluence is the level of the national debt, which is beginning to approach the level we saw in 1946 when measured as a percentage of the overall economy and significantly above the long-term average of 60.2%. Given that we are at record low interest rates at the moment, any significant increase in rates will result in much higher interest costs for the U.S. Treasury in the 4-5 years following the rise, meaning a ton of social programs will have to be cut or taxes raised (the latter of which is not politically feasible, nor particularly advisable given that there are always ways to intelligently and legally reduce your tax burden) should we wish to avoid financial disaster.
I think it’s time for a constitutional version of the Swiss Debt Brake, which was examined by the Philadelphia Federal Reserve (PDF). It’s been a dozen years since 85% of the voters in Switzerland limited their government’s ability to run deficits and add to the national debt, and there’s a reason their balance sheet is, relatively (though not absolutely) stronger than ours.
In any event, I’m about to run out to the local cheese counter at my grocery store to pick up several more samples so I have to go for a moment. But as you walk through your day today, take a moment to look around, enjoy the freedom, and realize that you’re living as a citizens in the greatest Empire the Earth has ever seen (well … 2/3rds of you, in any event) when measured by individual prosperity of the typical family. Born from those who emigrated their homelands, seeking a new place to raise their families, we combined the food of France, the banking of Great Britain, the industrialization or Germany … ad infinitum. Go outside, release a Bald Eagle, and let Ray Charles serenade you. This nation of scrappy, multi-racial, no-pedigree refugees somehow built this paradise in which almost anyone can succeed.
And then there’s all the other data that we’ve talked about over the years. On a per capita basis, murders are near an all-time low. Assaults are near an all-time low. Gun deaths are near an all-time low. Abortions are near an all-time low. Literacy rates are near an all-time high.
Now, we just need to fire Congress, bring our troops back home so we can stop trying to be the world’s police; then, I’ll break out the fireworks. Really … our elected leaders are, as a whole, such an embarrassment to this country. The fact we can overcome even their failures says a lot about the system we inherited.
1 It really makes no sense for investors to favor the S&P 500 for this purpose. A far more rational indication of the health of the national equity markets is the Wilshire 5000 Total Market Index, which measures the performance of virtually all publicly traded companies in the United States which have readily available market data (at the moment, it’s somewhere between 3,500 and 4,000 individual companies). When you buy it, you are essentially buying the entire publicly-traded United States business sector. For obvious reasons, it doesn’t track the 10,000+ other businesses that are available but highly illiquid; things you have to buy through the pink sheets, the Mergent (Moody’s) manuals, or direct negotiation with stockholders, like a private bank in a small farm town with $200 million in assets and no liquid market for the common stock.