How Stock Market Rallies Are Screwing Over Average Americans

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On Friday, the stock market closed out its best week all year. But that’s not helping most Americans.

Two new studies, one from the Federal Reserve and another from University of Michigan economists Bing Chen and Frank Stafford, recently found that economic inequality widened because the bottom 90 percent of Americans bought stocks at high prices and sold when the market was low.

The Fed found that more and more families bought into stocks during the booms of the 1990s and 2000s, but the bottom 90 percent bailed out between 2007 and 2010 and again between 2010 and 2013, so that their share of stock holdings fell by 4.4 percentage points. In contrast, the top 10 percent became increasingly likely to own stocks. Chen and Stafford came to similar conclusions, finding that families with lower levels of education and small account balances in their portfolios were most likely to sell during the downturn, while those with the highest education levels and already strong portfolios were the most likely keep buying stocks.

Then when the stock market began to surge again — it’s far surpassed its pre-recession highs and has kept breaking record highs — those who were already rich got richer off of it, while the average American didn’t share in the boom.

Some of those with lower incomes may very likely have had to sell at the bottom of the market as they faced mortgage troubles or unemployment, although the economists’ findings hold even when controlling for those factors, meaning some just had bad timing.

Even without the selloffs, a booming stock market doesn’t usually reach any but the richest Americans. Nearly 90 percent of those in bottom fifth of income don’t own stocks, an increase from 86 percent in 2007, and just a quarter of those in the bottom 40 percent own stocks. On the other hand, more than 90 percent of the richest 10 percent of Americans own them. When the market surges, just the richest benefit.

That’s helped drive inequality in and of itself. In the first two years of the recovery, the rallying stock and bond market contributed to the fact that the mean net worth of the top 7 percent wealthiest Americans rose by 28 percent, while for everyone else it fell by 4 percent.

There are even ways that a stronger market is coming at the expense of most Americans. Companies in the Standard & Poors 500 index are likely to spend $914 billion on buying their own stock shares and in dividends to shareholders, or 95 percent of their earnings. Those buybacks have helped fuel the stock market rally, as companies that have done the most have seen their stock prices gain more than 300 percent since March 2009. But it also means they have less money to invest in other things like wages or investments that would create jobs. The share of cash flow used for buybacks has nearly doubled over the last decade while it’s dropped for capital investments.

Over the same decade, Americans have experienced stagnant or falling wages despite increasing their productivity by 8 percent. One example shows the connection: Walmart spent $7.6 billion on buybacks last year, but for the same amount of money could raise all of its employees’ pay to at least $25,000 a year (as they have demanded) without hurting its business or raising its prices.

The rallying stock market has also been disconnected from the rest of the economy. GDP growth has been slowly recovering, but the stock market has zoomed past it. Between March 2009 and June 2014, the S&P 500 stock index increased by 4.7 percent a quarter, which is five times faster than GDP growth, the biggest gap since at least 1947.