Household Worth Plunges -- Bad News for the Stock Market...

U.S. Householders saw their net worth decline by $11.2 trillion during the 2008 fiscal year. This represents a a drop of 18%, wiping out four years of gains in homeowner wealth. This record drop was a result of a combination of two factors. First was the decrease in the real-estate market (a drop of $937 billion. Drops in the construction industry are almost always harbingers of economic troubles, because homes are often the largest, most stable investments that most people will make in their lives. The second factor was the large drop in the stock market. Direct holdings, insurance holdings, and mutual funds all fell by massive quantities. This accounted for the largest drop in household wealth. People lost pensions and retirement accounts, people lost investments, but most of all people lost faith in the investment markets in America. This has been reflected in the fact that despite the massive drop in wealth, American households have actually started to pay back their debt for the first time in years. They have also increased their savings. This is good news for banks, people need to put their money somewhere and this will help in their recovery. The real-estate market will also bounce back, it always does. People simply need homes, and as they move to find new jobs, they will purchase homes, and as the population increases, new homes will be built. The construction industry has dips, but it never completely folds. However, the stock market is still in serious trouble. As wealth declines and savings increases, investment will drop even further. This would seem to indicate that the current lows in the stock market do not represent the bottom of the recession. We've learned in economics that people fail to invest when they do not trust the market, when in essence that is exactly what they should be doing. Too much savings will cause the market to drop even lower. The only silver lining in the story is that at some point, the market will drop so low that people will take the risk in investment because the potential gains are so high. The market will have nowhere to go but up. Unfortunately for many businesses, this day does not seem to be too near. That means that we will see more corporations folding and going under before the market improves. Eventually the returns on investment will overtake the interest rates banks are willing to pay to hold your money, and people will begin to re-enter the market. Hopefully this restoration of balance will occur sooner rather than later...