The Stark Reality Of Modern Stock Market Rallies

If you’re concerned that households, by far the largest owners of the US equity market by cohort, might sell their stocks, driving additional downside for equities, don’t be. Because the rich own all the stocks, and all the cash too, so if anything, households will probably be buyers, especially given rising cash allocations.

“Some investors worry that the combination of a higher cost of living, rising bond yields and poor trailing equity returns may force household capitulation in the equity market,” Goldman’s David Kostin wrote, in a new note. “At first glance, investor worries appear to be warranted,” he said, noting that generally speaking, peaks in equity allocations can be a harbinger of subpar returns over the ensuing 10 years.

For Goldman, though, the prospect of household equity selling isn’t “a primary concern,” or at least not right now. Kostin’s rationale was straightforward. Stocks, he wrote, are “overwhelmingly owned by the wealthiest cohort of Americans” and those Americans, by virtue of being wealthy, are “largely insulated from the impact of higher inflation.”

He called the breakdown of equity ownership by income cohort “astounding,” which it is. But the evolution of that breakdown is what’s most astonishing. The annotations in the figure (below) should be alarming to 99% of the country, and perhaps to the other 1% too, to the extent social stability is a prerequisite for the preservation of the system which is perpetuating their fortunes.

Sometimes, I think I’m the only person in America who can see this or who understands why it matters.

To be sure, tales of the 1%’s growing share of all the things a modern capitalist economy has to offer are ad nauseam talking points that feature heavily in campaign trail rhetoric. Such stories and statistics are the cornerstone of any good Bernie Sanders stump speech, for example.

But due, in part anyway, to the bottom 90%’s (understandable) reluctance to feel sorry for the 90th to 99th percentiles, the most critical chapter of the story never gets told: It’s not just that the rich are getting richer. In some cases, the rich are actually getting relatively poorer, while a vanishingly small number of households and individuals absorb everything.

Goldman’s Kostin cited the share of the corporate equity market held by the top 10%. But all of that cohort’s share gains are attributable to the growing dominance of the top 1% — and then some. The figure (below) shows that during the post-financial crisis equity market boom, the 90th to 99th percentiles actually lost share of the US stock market.

Needless to say, the middle class lost share too. So did lower-income cohorts.

So, on a relative basis, only the richest 1% of the country benefited from the post-GFC boom in stocks.

The figure (below) makes the point more clearly. It shows the change in ownership share of the US corporate equity market since Lehman by income cohort versus the S&P 500’s gain over the same period. (It’s basis points to percentage points, but that apples-to-oranges measurement was the easiest way to construct the chart for a variety of reasons.)

Again: On a relative basis, almost no one is benefitting from equity market gains.

This is mirrored in data showing the breakdown of checking account balances and physical cash ownership in America documented last week in “The Sad, Sad Story Of $3 Trillion In Pandemic Savings.” The top 1%’s share of readily available cash jumped almost 11 percentage points over the pandemic period. As of March 31, 2022, that income cohort controlled almost a third of the nation’s cash.

In the same note cited above, Goldman’s Kostin referenced the top 10% in the savings discussion too, noting that those households together account for $12 trillion of the $18 trillion in cash held by all households. “Given that wealthy households have historically maintained a high allocation to equities, we expect some of this cash will be used to buy equities in the coming quarters,” he wrote. JPMorgan made a similar point a few days previous.

There are two takeaways from the above, one strictly related to the outlook for equity flows in a challenging macro environment for lower- and middle-income households, another related to a trend which, in my judgment anyway, isn’t conducive to societal cohesion. I’ll take each in turn:

  • Most stocks are concentrated in the hands of the wealthiest households, which tend to spend less of their disposable income on the goods and services for which prices are rising the fastest in a high inflation regime. Those households also control a disproportionate share of the country’s cash and liquid savings, including the lion’s share (68%) of the $3.26 trillion in “excess” savings accumulated over the course of the pandemic. As such, they’re more likely to be buyers of stocks going forward than sellers, with the caveat that there are, of course, historical instances of large selling by households (e.g., the 1980s and 2007/2008). That’s bullish or, at the least, not bearish.
  • On a relative basis, gains in US stocks are benefitting almost no one in the country. The top 1% is taking share from the rest of society over time, and that drift is perpetuating itself. Crucially — and this can’t be emphasized enough — this dynamic will eventually render income cohorts meaningless. Currently, it still makes sense to talk about the “top 1%,” but even that exclusive category will succumb over time if steps aren’t taken to arrest this perpetual motion machine. We’re on a trajectory that will eventually see a literal handful of people controlling the entirety of America’s wealth. I’ve said this before, and I’ll reiterate it here: That isn’t a political statement. I mean this in the most literal sense possible. This is conceptually akin to climate change. It’s mostly imperceptible on a day-to-day basis, but if it’s allowed to continue, we’ll look up two centuries from now and discover that three-dozen individual people own 99.9% of everything.

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14 thoughts on “The Stark Reality Of Modern Stock Market Rallies

  1. At least most of the cash will be safe during a nasty down turn then, right? Although, as you mentioned much could be hidden in foreign accounts.
    Their instinct to secure their securities could also be self fulfilling if they listen to the majority of CEOs that expect a recession.

  2. A couple of thoughts. I’m not convinced there will be anybody around to look up and see anything in 200 years. No water, no energy, little or no food = no people.

    Also, as you have pointed out often in the last four or five years the data show that the biggest buyers of US equities are the companies that issued those equities in the first place. When they buy their own stock back, they own it and put it on the balance sheet as Treasury Stock, the value of which is deducted from the firm’s assets and equity. Because it’s no longer outstanding, treasury stock is not counted as “owned” in the data you present above. But if we took all the treasury stock (owned by the firms that bought it back) and added it in to total outstanding stock and lumped the company positions in with the 1%,we’d undoubted have way more than 50% of our equity wealth in the hands of the 1% and the companies they control.

  3. I wonder how much of the top 1% are people like Elon Musk- who likely has the vast majority of his stock holdings in one company that they started (Tesla) after 1989 or in a company that grew in value disproportionately more than the average market growth since 1989?
    Not that it changes the facts presented but might explain part of the reason why?

  4. I agree with your overall assessment that highly concentrated wealth is bad for the country and could eventually topple a government (whether it is based on capitalism or not) as history has demonstrated in many ways. However, it seems you are mixing your demogoguery concerns for the handful of billionaires that sit atop the wealth mountain with the conveniently accessed wealth statistics of the 1%.

    The U.S. has 3.3 million people in the top 1% by wealth. The top 1% by income does not completely overlap, so let’s call the unique total population somewhere above 4 million. Even the 40 million representing the top 10% have very little incentive to upset the apple cart. Compare that to somewhere like Russia and its 145 million people. There are nowhere near 1.4 million oligarchs and clearly all the wealth is concentrated in a relatively small number oligarchs who control both the businesses and the government. Yet there has been no effort by the general population to overturn the government despite much worse conditions.

    U.S. wealth is no doubt most highly tilted to the several hundred billionaires and that extreme wealth does create a competing power to the government. That is why so many in Congress attempt to wrestle that power away and why the socialistic policy ideas are being introduced. Every bracket’s income and wealth continues to rise, but it rises at a faster pace the higher up the asset ladder you go. The top 1% are losing ground to the top 0.00002% (representing the 1000 most wealthy) even faster than the top 10% or top 50% are to the top 1%. Fairness of taxes and policy matters are legitimate governing debates.

    My fear is that media talk on this subject conveys the message that there is no hope for the bottom 90% as they are doomed to a fate they cannot control. And while I realize your message is to a subscriber base nearly all from at least the top 10%, your empathy and desire to make us think about the bottom 90% makes your message tone consistent with the general media.

    For instance, accumulating some wealth in this country is often a matter of spending habits for the majority (not all) of people. That is largely why not everyone in the top 1% or top 10% of income are also in the same wealth bracket. It’s an even bigger factor for why those in the top 50% of income are not in the top 50% of wealth (or even the top 60% of income). More importantly, the issue filters down and becomes more important in all levels of income.

    When you don’t have anything and don’t earn much income it becomes hard to see very far in the future. Instead of saving for a down payment on a house or investing the money (IRA, 401K, etc.), it’s easier to envision saving enough money for an iPhone or a new car, especially because there is always some kind of easy credit plan available to gain access to those goods more quickly. Yes, inflation impacts a larger percentage of income for this income group, but there is also a prevalent tendency to consume more than they need. Volunteer for a food bank drive, student summer meals for a Title 1 school, or any number of giveaway charity events and you will no doubt see a steady stream of expensive new vehicles with everyone in them on their iPhone (while I drove a 20 year old vehicle and never paid more than $100 for a mobile phone with a prepaid MVNO agreement).

    It sounds terrible to some for the more fortunate to comment on spending habits of others, but the point is it is still possible to climb the wealth ladder in this country without catapulting to the billionaire ranks because you can sell a product around the globe. My parents lost the family farm during the Volcker Fed years farm crisis (banks would not lend on farmland) and were not even in a position to help me prior to that. I earned a good income, but never a 1% income, and my wife stayed home with the kids. I never got more than a few thousand dollars in stock options and most of the shares from those companies have plummeted over time. We paid off both our student loans (at 9% interest), bought our first home at 12%, paid for our kids’ college at top notch schools (we were not eligible for aid), while I climbed the corporate ladder for 25+ years. Most importantly, still married (no asset splitting through divorce) and always lived on less than what I could make. Retired from the corporate world at 50 several years ago over management control issues (frustration for what I could pay my people) and because I had invested enough to do so comfortably.

    While my salary was statistically on the upper end, the biggest difference I saw with peers and neighbors was how they spent. Like those in lower income brackets, they spent lavishly on possessions and new vehicles. Unlike the lower incomes, they were also able to spend lavishly on their homes and vacations. Put in the simplest terms, I have never bought an iPhone, but made millions on everyone else doing so. I think Apple is well run and makes great products, but even now I don’t require that luxury. Ironically, I would not be as well off now if those around me had consumed less. Right or wrong, that is how the system has worked during my lifetime.

    My kids have a bit of a head start because they grew up with a supportive home life and emerge from college with no debt, but I see no issue with them repeating the cycle. My oldest helped pay for his wedding and is paying off his wife’s student loans, while buying his first home a year after marriage (starting their family shortly thereafter). My youngest started contributing to his brokerage account while still in school because he worked even though I paid the college costs. The most important financial lesson all my kids have learned is that you spend less than you make while investing for the future; however distant that future seems.

    You have alluded to it previously and Ray Dalio has gotten quite pointed on it; U.S. power is in the decline stage, but it will require the replacement of the dollar as the world’s reserve currency and an expanding debt balloon that eventually results in default before the current U.S. global regime is replaced. Meanwhile the government will continue to try to wrestle power from the wealthiest by employing more socialistic policies even while both the right and the left battle for control with ever more extreme views.

    That is the fate of a democracy, regardless of the country’s position on the socialistic to capitalistic spectrum (which is a different axis than the autocratic to democratic spectrum). Our democracy was never intended to have a two party monopoly. If it was an industry, the government would have already broken up the monopoly enjoyed by DNC and RNC. History indicates the U.S. will eventually move to a multi-party system and plurality votes will become the norm. Those parties will form and re-form ruling coalitions. Each ruling coalition will have its own policies by which they try to wrest power from the ultra-wealthy in the name of redistributing wealth. Meanwhile, each will depend on the top 10% for the funds that keep their party in power.

    If a ruling coalition starts nationalizing industries, it is possible that upward mobility becomes different and/or more difficult. For now, I still see the American dream of upward mobility as still possible for the majority of those who choose to prioritize it for many years over more immediate gratification. In fact, decreasing discretionary consumption would also lessen the gap with top 0.00002% as most of them made their money on discretionary goods and services rather than food and energy.

    1. “Every bracket’s income and wealth continues to rise, but it rises at a faster pace the higher up the asset ladder you go. The top 1% are losing ground to the top 0.00002% (representing the 1000 most wealthy) even faster than the top 10% or top 50% are to the top 1%”

      Exactly. And that dynamic will spin faster and faster over time, until it subsumes everything. At several junctures over the past two years, it spun so fast at the very top that it appeared as though Elon Musk might make a relative pauper of Jeff Bezos.

      It seems like you’re generally agreeing with me. As far as the data, yes, it’s obviously easier to use conveniently accessible statistics that can be quickly dropped into a spreadsheet versus constructing one’s own series or accessing more obscure datasets, but the overall thrust of this article isn’t really disputable. In previous articles I’ve used Piketty’s data to make similar points, but the charts come out cleaner and are (much) easier for readers to identify with when the visuals are constructed based on immediately recognizable cohorts. Especially when it comes to folks’ leisurely Saturday reading. Ha.

      On the upward mobility point, it clearly depends on the circumstances. You referenced Ray, so I will too: He’s repeatedly warned that inequality of opportunity is becoming so stark in America that for some cohorts, the idea of upward mobility may as well be pure fiction. You’re correct to suggest that it’s theoretically possible to beat even the longest odds (some people made it out of Syria between 2011 and 2016, after all, and I imagine one can find a handful of examples of people who’ve made it out of Yemen since 2015 to live good lives in other countries), but the question isn’t really whether one can do well for oneself by saving scrupulously, staying at the same company for a quarter century, never buying an iPhone and never divorcing, the question is whether the system is such that someone possessed of average intellect, a willingness to work a standard 40-hour work week and who’s reasonably frugal, can expect to one day own a home and retire comfortably. The answer to that question, I’d argue, is increasingly “no.” That doesn’t mean it’s always “no,” it just means that both anecdotally and statistically, Americans are finding that to be harder and harder compared to two or three generations ago.

      In other words, when you say “I still see the American dream of upward mobility as still possible for the majority of those who choose to prioritize it for many years over more immediate gratification,” I’d agree with you with the caveat that I’d remove “the majority of those” and replace it with “some.” I think it’s possible for the most determined members of the polity, less so for the average person.

      But the point here is really about relative wealth. The problem with having a super-class in an era of technological and biological innovation (and where data is power) is that eventually, the Elon Musks of the world will start doing things like availing themselves of new ways to extend their lives and enhance their intelligence that aren’t available to anyone but them. Musk has already floated the idea of interfacing his brain with data, which sounds farcical until you remember that he has a company which is working on just that.

      These people are going to become gods, and by the time this reality dawns on everyone, it’ll be too late. I’m not joking. What would happen, for example, if next year Musk revealed that one of his companies made a breakthrough in nanotechnology with the potential to cure all diseases, and the price tag for the therapy is $75 billion? What if he refused to sell it to the government or share the science? What would all the rest of us do? Would there not be something incredibly discouraging about working for 40 years to retire comfortably on a few million with decent healthcare knowing that 25 people are immortals? What does “upward mobility” even mean in a world like that? That world is coming. In some ways, it’s already here. Musk wants Twitter now, but what happens if, after he takes SpaceX public, he becomes a trillionaire, wakes up one day and decides he wants to own one of America’s largest banks? Then what happens when he buys a bank and decides to — well, who knows what he might decide to do. As he tacitly warned Joe Biden recently, he (Musk) is likely to control America’s space program at some point. A while back, he taught a monkey to play Pong with its brain. And so on.

      Coming full circle, we have to do something to reclaim control over these super-people, or we’ll all be second class citizens eventually. This isn’t robber barons building railroads. This is demigods monopolizing the future. Power relationships are now totally asymmetric. Who is Jamie Dimon to Jeff Bezos or Mark Zuckerberg, for example? The answer is: Nobody. Dimon is an absolute nobody to them. Dimon can see aggregates about the saving and spending habits of Americans. Zuckerberg has a direct window into how three quarters of Americans experience reality. And he has the capacity to shape that reality through that window. The kids you mentioned: Maybe they don’t use Facebook, but maybe they do, and they certainly use Google. When they go to make a decision about where to have a wedding, what house to buy, what music to play at a dinner party celebrating that home purchase, where to buy the wedding cake, what to get you for your birthday and virtually every single other decision they will ever make from the most consequential to the most trivial, Google or Facebook or Amazon or, more likely, all three, will be a part of that decision, influencing it, guiding it and monetizing it at every turn. Apple has so far eschewed the temptation to abuse its power, but that isn’t guaranteed in perpetuity. Tim Cook won’t be around forever.

      One person who understands all of this is Xi Jinping. “Common prosperity,” and, more narrowly, the crackdown on Chinese mega-tech, was a preemptive effort to avoid a scenario where Jack Ma became a god.

    2. “Yet there has been no effort by the general (Russian) population to overturn the government despite much worse conditions”- this is occurring because Putin and his paid police force poisons, jails or kills anyone who even thinks about standing up against Putin (i.e. Navalny) more so than because the Russian people are accepting of the system.

      With respect to your comments about living below your means, I agree with most of your comments. When my kids were in high school, I made sure they had a job, opened an investment account, knew how to not only make a budget but could compare actual to budget, and knew how to dream about their future with the knowledge of how to use a compound interest calculator.

      Understanding how the world works and then being able to navigate the system to achieve one’s personal goals is an important but rare skill – probably because it often requires delayed gratification, as you stated.

      1. I would guess that the number of ‘graduating high school seniors’ with these skills are somewhere in the same percentage as the 0.00002% who control all the wealth sadly.

    3. Capitalism depends on contracts being honored and enforced. If the Hoi polloi get too restless, that could get called into question.

      But luckily for the new robber barons, Americans tend to lurch rightward when under stress.

    4. “When you don’t have anything and don’t earn much income it becomes hard to see very far in the future. Instead of saving for a down payment on a house or investing the money (IRA, 401K, etc.), it’s easier to envision saving enough money for an iPhone or a new car, especially because there is always some kind of easy credit plan available to gain access to those goods more quickly. Yes, inflation impacts a larger percentage of income for this income group, but there is also a prevalent tendency to consume more than they need.”

      I think you’re spot on with this, but also feel that what you’re describing is understandable from the human side. For people struggling to make ends meet at the end of each month, saving for a moderate and reachable goal is something I can sympathize with. For someone only able to squirrel away a few $100 a month, making the down payment on a house can seem about as daunting as climbing Mount Everest. I think it’s very human to make and try to meet intermediate and reachable goals-as detrimental as that might seem seen from a purely statistical view from the outside.

      One of friends recently spoke to us about his efforts to buy a home. As he’s watched prices soar over time, he said he felt like someone running after a train leaving the station, trying to catch it as it accelerates faster and faster. I think a lot of folks feel this way. It’s demoralizing to watch your goal receding into the distance as you scrimp and save each month to put something away. People don’t feel like they’re just climbing Everest, but an active volcano version that’s rising faster than they’re climbing.

    5. I agree with a lot of your sentiments, but for the main thrust (I doubt I’ll change your mind) but your anecdote does not describe what you think it describes…
      A plumber or car mechanic (especially with a single earner family) will rarely work 25 years and retire at 50 with a million dollars from investments because they didn’t treat themselves to coffee or an iPhone. While smart business decisions (e.g. owning real estate) are not directly tied to higher education, I would challenge that systemic racism (and sexism) in education, hiring, promotions, and yes even mortgages and real estate sales are the barriers to many accruing wealth, not “consuming more than they need”.
      The proper lament is: “Why are the Baby Boomers pulling up the ladder?”

      1. (The main article is about the uber-rich, totally agree we live in an oligarchy and Americans worship a flaw, the extreme aggregetion of wealth, in the system which will inevitably bring down Pax Americana)

        For the comments, numbers might speak louder:
        Median (half are below this) gets $20 an hour, 40 hours a week = about $3200 a month.

        $200 a month saved every month with 7% compounding interest over 20 years is $100k.

        Decades of manual labor almost gets you a down payment, if you’re lucky enough to never have a medical issue (and I’m not quite sure where children and their education costs comes in)…

        It literally takes generations of good choices and luck for people to even get the opportunity (if ever) to drop out of Harvard and become a Billionaire.

    6. In my opinion Dennis reasoning is highly flawed. It lacks recognition of concepts like luck or randomness/coincidence that do impact real life outcomes.

      You don’t climb a corporate ladder steadily without luck/coincidence, you don’t make millions from the stock market without luck/coincidence, prudent spending contributes only a “few bucks” to wealth accumulation.

      If the concepts of luck/coincidence are taken into the equation it becomes a normal random distribution, with a small % “very lucky” people and also a small % of “very unlucky” people. Off course the bracket of “very lucky” people will also contain some people considered to be genius, but you need to wonder whether this is purely ability gained or DNA driven.

  5. Well, and i do not mean to disparage the one percent for their prowess but it seems like there are no species at the watering hole with the ability to predate or even make wary the current apex species. At some point some figurative disease and or other beneficially destructive population regulator should remedy their unnatural population. We will be long gone by then, I am sure of that.

    Where the one percent do not know how to change their oil, the lowest of the ninety percent do not even assign a priority level to understanding macro economics. That is a problem (knowledge distribution). They (the financially unwoke) cant follow the money. The republican manalishi is most happy with that. Just try being a vocal financially woke person in a red region of America, you can still be conservative leaning and yet lose lifelong friends, alienate entire swaths of family, be banished from the circle of trust at work, and be labelled a liberal. Manchin & Co. would be trying to silence Bloomberg if the red state army began to understand the world they actually live in.

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