Market Extra: ‘Wealth effect on steroids’: Here’s the potential fallout from $22 trillion lost by investors this year, according to BofA


Bank of America says a “wealth effect on steroids” may impact the U.S. economy as a result of the fall in the value of stocks and bonds and other assets worth trillions of dollars in 2022.

“The $22 trillion lost in equities, bonds, cryptocurrencies and real estate this year would represent about a $700 billion hit to consumption, which represents about 4% of total current consumption, plus or minus,” said a team of strategists led by Savita Subramanian, the bank’s head of U.S. equity & quantitative strategy, in a note to clients Monday.

Bank of America

Subramanian was using a calculation from the National Bureau of Economic Research (NBER), which has found that one dollar of wealth destroyed translates into a ballpark 2% to 4% hit on consumption.

The NBER defines the so-called wealth effect as the idea that households becoming richer owing to rise asset values, such as stocks or real estate will spend more and in turn stimulate the broader economy. That wealth effect can also unravel in tough times.

Read: Stock-market investors should ‘focus on the marathon, not the sprint,’ says Bank of America, positing an S&P 500 at 6,000 by 2032

Down 16% so far this year, the S&P 500

is headed for its worst performance since the height of the Great Financial Crisis in 2008. And real estate prices have been under pressure this year amid higher U.S. interest rates and fears of a recession.

Subramanian and the team say the $700 billion figure may be overstating the impact “given that U.S. consumers hold a part of these instruments.” But the the wealth effect could be more pronounced due to a “more democratized market,” she said.

Democratized investing amped the wealth effect of the 2000s, owing to broadening home ownership. A subsequent $8 trillion loss in household net worth owing to the 2008 crash had a knock-on effect of as much as 1 percentetage point quarter on quarter on a seasonally adjusted rate at the peak.

As for the current climate, they see signs of democratized investing via retail investing that while down from late 2020/early 2021 highs following peak fiscal stimulus, is still higher than pre-COVID. They estimate it comprises around 20% of large capitalization and 28% of small-cap trading volumes.


More evidence: users of trading platform Robinhood

are also above pre-COVID levels, even if down from peaks. And deal values surged in 2021, with around 60% of that via special purpose acquisition vehicles (SPACs).

Subramanian also noted a June survey by BofA’s cryptocurrency strategists that found 43% of respndents planned to initiate crypto holdings over the next six months, and 75% were planning to add more over the next six months.

Of course, that survey came before the bankruptcy of crypto exchange FTX and more recently BlockFi. Stress in that asset class has kept bitcoin

at lows not seen since late 2020.

Opinion: As crypto losses and exchange failures mount, here’s how tax experts say to make the best of it

And: Crypto lender BlockFi is suing Sam Bankman-Fried over his shares in Robinhood: report

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