Poor US households don’t invest much in the stock market
But stock market crashes still hurt them…
This post comments on an excerpt from a LinkedIn post May 12 from Mohamed El-Erian, President of Queens’ College (Cambridge) and former CEO of PIMCO, in which he said: “US stocks — and the NASDAQ in particular — made a valiant effort to rebound today … only to succumb as of now to another round of selling… As a result, the year-to-date losses in the index are now a staggering 28%.”
What is staggering — in addition to the 27% selloff by close of May 12th in the NASDAQ year-to-date — is the 136% rise in this index in the 3 years to end-2021 (to 15,645, up from 6,635 at end-2018).
On no planet is it rational to have a more than doubling of such a stock market index in 3 years — that is, to perceive a more than doubling in the value of a future stream of corporate earnings of the companies in a broad index such as the tech-heavy NASDAQ. In theory, that is what you purchase when you buy the stocks in an index — a stream of future earnings.
This is why re-establishing 2-way price risk is important — so that market participants understand that stocks can move up and stocks can move down — not just up, up and away!
This is also why future economic historians may see this issue as the error of our times, not gearing monetary policy at least in part to containing this excess.
Who benefits from this excess caused by the wealthy trading in the financial markets? I think I answered my own question. Not the poor. See the chart above from Fed data showing that the top 1% of US households by wealth hold nearly 54% of the value of US equities, while the bottom 50% of households hold less than 1%.
Even though poorer households have little direct stake in the market, when markets crash, the recessionary effects negatively impact them more than the rich. Through job loss and reduced income.
This is not an indictment of capitalism. Quite the contrary, it is a call to at least think about using policy to curb excessive volatility in the interest of reducing income and wealth inequality, thereby shoring up the social fabric… and capitalism.
It’s a little bit better for poorer households, at least percentage-wise, as far as total net wealth is concerned. Total net wealth includes holdings of real estate, in addition to equities and other assets, and nets out debt such as mortgages.
The chart below, also from the Fed, shows that the bottom 50% of households by wealth held 2.6% of net wealth vs. nearly a third for the top 1% wealthiest households. But this disparity has been increasing over time, as the chart shows, just as income inequality has been rising. See the charts at the end that show how the US compares unfavorably on income and wealth inequality to OECD peers.
Net Wealth By Household Wealth Level — going in the wrong direction…
Net wealth disparity is increasing…
There has been a lot of criticism of the Federal Reserve of late for being late in combatting inflation, which I have discussed in other posts, here and here. Not to critique the Fed critics in this post again, but it is worth pointing out that maybe a reason the Fed postponed tightening a bit is that evidence shows that wage inflation lately has been favoring the lowest wage earners. See the chart below from an Economist article from last month: the redish line shows wages for the lowest paid rising fastest. This serves to correct America’s woeful income and wealth inequality a little.
US Income & Wealth Inequality — a Comparative Perspective
