The Tragic Irony Of America’s ‘Too Big To Fail’ Stock Market

Most of my days are spent digging around for interesting things to highlight, and in the course of that daily quest, I came across a report dated November 20 from Richard Curtin, who runs the University of Michigan’s monthly consumer sentiment survey.

The subject is “stock ownership and stock price expectations,” and the data Curtin presents reveals an interesting trend.

Specifically, stock ownership rates for younger investor cohorts and also for investors with lower household incomes are on the rise. The ownership rate (defined as “any directly held stock, stock in mutual funds, or any stock held in retirement-related accounts”) for those in the bottom 20% of households was 27% in 2020, up pretty sharply from 21% a half-decade ago.

“Ownership of stocks rose to an average of 69% of all households in 2020, up from 61% in 2015,” Curtin wrote, in the color accompanying the report, adding that “the steepest rise in stock ownership was among subgroups that had the lowest ownership rates in 2015.”

Notably, ownership among households in the second income quintile jumped 14 percentage points over the past five years. A similar trend emerges when you break things down by age. Those in the 18-44 bucket saw ownership rates rise 12 percentage points since 2015.

This might sound like good news. After all, one reason for the ever-expanding wealth gap in the US is the concentration of equities in the hands of a relative few.

But the problem comes in when you think about why it might be that a larger percentage of lower-income households now own stocks. Curtin has some ideas about that.

“The smaller growth rates among the top income subgroups reflected the fact that those ownership rates were already nearly universal, but the outsized gains among lower age and income subgroups largely reflected the impact of Fed policies favoring stocks over interest denominated accounts,” he wrote.

In other words, when you’re rich, you generally own stocks. And once 100% (or nearly 100%) of rich people own some equities, that ownership rate can’t rise any further, by definition. Because it’s expressed not in terms of value, but as a percentage of that income cohort’s participation in the market, where “participation” can mean owning one share or 1 million shares.

While lower-income households are more likely to own stocks now than they were previously, that may be because savings accounts and bonds don’t offer any semblance of return due to Fed policy. That’s fine as long as stocks keep going up. But needless to say, lower-income households don’t have the capacity to absorb a serious hit to their finances. So, the higher the percentage of wealth (and “wealth” is probably a misnomer when you’re talking about lower-income households) tied up in a volatile asset, the more precarious the situation.

“It could also be argued that the higher risks associated with stocks may be inappropriate for younger and lower income households,” Curtin went on to say, underscoring the point.

Of course, he also notes for that younger investors, the longer time horizon mitigates that risk, hence the classic axiom that the younger you are, the larger your allocation to equities should be. But that caveat isn’t applicable when you’re breaking things down by income quintile.

The sad irony in the above appears to be that the very same policies which are inflating the value of the assets concentrated in the hands of the rich (and thereby exacerbating inequality), are forcing lower-income households to buy those same assets, at considerable risk versus what they might otherwise be investing in were yields on savings and bonds higher.

This also speaks to the notion that the stock market cannot be allowed to collapse, because a larger percentage of the meager assets held by lower-income households may be tied up in equities.

And that’s where this gets extremely circular. Fed policy is exacerbating inequality by driving up the price of stocks, but it’s also forcing lower-income investors to allocate more to equities. Allowing stocks to fall thus jeopardizes lower-income households more than it would have just five years ago.

But pushing stocks higher risks exacerbating the wealth divide, because despite the rising share of stocks as a percentage of assets held by lower-income groups, higher income groups still own the vast majority of the market. “Growth in the concentration of wealth is also evident, as the holdings of the top fifth rose from nearly 100 times to nearly 200 times the level of the bottom fifth from 2015 to 2020,” Curtin remarked, in the same study.

For what it’s worth (figuratively and literally), Curtin observed that “the median value of equities held among current stock owners rose to $118,800 in 2020 from $101,600 in 2015.”

That figure for the bottom income quintile is a pitiable $21,000. On the bright side, that’s up 109% from 2015, when it was just $10,000.

Finally, as a kind of tangential factoid, household net worth rose by $3.8 trillion in the third quarter to a new record, the Fed said last week.

The ongoing rebound comes on the heels of Q1’s historic ~$7 trillion collapse (red in the figure) which had no precedent of any kind.