House price declines accounted for much of the decline in net worth for the median household. But, more than in previous periods, household wealth was harmed by declining share prices through direct equity exposure and retirement plan holdings. Households are thus confronting the risks of income statement shocks through job losses and more significantly correlated changes in the value of virtually all other assets.
The heightened concern about these risks is indicated by the extremely high equity risk premiums, which reflect, among other factors, the risk that investors who suffered a loss in income may also be forced to sell their stocks when valuations are low. Traditional rules of income and asset diversification appear to offer scarcer protection than generally advertised.