Household Assets to GDP

July 25, 2021 - Assets

FAQ

1. Why do household assets relative to GDP matter?

The wealthier people feel, the more they spend. So if assets are too high relative to income, it is also indicative of assets being expensive. This overvaluation could portend a future period where assets decline relative to GDP. This decline will cause people to increase savings, reducing consumption and GDP growth.

2. What have been the major influences on household assets relative to GDP for the past 60 years?

Leading up to the mid-1960s, there was a standard stock market boom, where stocks went to the high end of their historical valuation range (up until that point). In the 1970s there was increased inflation and rising interest rates. Rising rates helped depress stock and bond prices. Declining inflation and interest rates in the 1980s brought asset prices back up. In the 1990s there was a tremendous increase in stock valuations that peaked in 2000 that increased assets. After the 2000-02 bear market in stocks, there was a tremendous increase in real estate valuations leading up to 2006. The 2008-09 recession coincided with large declines in real estate and stocks. Since that time, high-quality bond yields have fallen so low that they yield negative returns after inflation. These low bond yields are now supporting stock and real estate prices as well.

3. What is likely for asset values going forward?

The low bond yields of today are not permanent. At some point, rates will rise relative to inflation and they will depress asset prices again.