Last year there was a devastating public health crisis, an imploding labor market, a lot of political unrest, and – surprisingly – a roaring stock market.
All in all, it was an expansion of inequality in a nation where economic disparities were already growing.
It boils down to which groups have been hardest hit by the falling parts of the economy and which have benefited the most from rising stock prices.
In the stationary part of the economy, low-wage workers were disproportionately affected by job losses. At the same time, Americans benefited from price gains: both those who own individual stocks in brokerage accounts and those who offer stocks in personal retirement accounts such as mutual fund IRAs or from employers such as 401 (k). s.
But that’s where the inequality set in, according to an analysis of data from the Federal Reserve’s 2019 consumer finance survey. Although the distribution of income in the United States is unequal, it is all the more so for ownership of financial assets in general, and stocks in particular.
The triennial survey collects in-depth financial information from a sample of American “business entities” – we call them families – including income, types of assets they own, and their value.
Analysis of this data shows that in 2019, the top 1 percent of Americans in wealth controlled approximately 38 percent of the value of financial accounts that held stocks. Broaden the focus to the top 10 percent and you’ve found 84 percent of the value of all Wall Street portfolios.
By the broadest definition of Wall Street stake, which encompasses everything from 401 (k) in the workplace to personal IRAs, mutual funds, and retirement stocks, just over half of American families have at least one market-linked financial account while only one in six report direct ownership of stocks. Wealthier people are far more likely to have these accounts than middle-class families, who in turn are far more in the market than working-class or poor families.
And unsurprisingly, the rich are more likely to have larger portfolios.
A paper napkin calculation that assumes that all market players have gained an average of 16 percent of the S&P 500 last year would mean American families fattened their portfolios by $ 4 trillion for the entire last year. But $ 3.4 trillion of that would have gone to just 10 percent of the families, the other 90 percent would have split $ 600 billion.
Beyond the gap between the very rich and the merely affluent, there is also a gap between the affluent and the middle class. Only half of households in the 40th to 49th percentiles of net worth have brokerage or retirement accounts that contain stocks. For households in the 80th to 89th percentile, 84 percent are invested in at least one company.
Additionally, the median portfolio size for households in this middle group was $ 13,000 in 2019, which would have gained about $ 2,000 on last year’s market. The typical family in the wealthier group had $ 170,000 in the market and would have made about $ 27,000 with a similar portfolio.
These wealth inequalities are far greater than the inequality we normally talk about on the income ladder.
Jan. 26, 2021, 8:18 ET
The analysis found that in 2019, 14 percent of individual income went to 1 percent of the richest American households. But that 14-to-1 relationship was nothing compared to other categories.
In addition to controlling 38 percent of the value of stock accounts, the top 1 percent controls 18 percent of the equity of residential real estate, 24 percent of the cash in liquid bank accounts, and 51 percent of the value of accounts that individuals hold directly.
Edward N. Wolff, an economist at NYU, measured economic differences on a scale of 0 to 1 (the Gini coefficient). He says that household income on the 2019 survey scale is 0.57 on the inequality scale, slightly higher than 20 years ago. On the same scale, net wealth inequality is 0.87 compared to 0.83 in the 2001 survey.
The differences go beyond wealth groups. Analysis of the consumer finance survey found that black Americans, who already have a disproportionately low percentage of the country’s income, are even worse off when it comes to assets.
They made up 14 percent of respondents but made up only 8 percent of 2019 income, 5 percent of money in cash, and 2 percent of Wall Street holdings. Even if you remove the top 1 percent – a group that is disproportionately white and controls a disproportionate share of all categories – the African American share of Wall Street equity rises to just 3 percent.
The difference is smaller, but still present, among middle-class households: African Americans made up 13 percent of that group in the survey, earned 11 percent of income, and owned 9 percent of Wall Street stock.
It’s not uncommon for Wall Street to view grim developments as good news. A mass layoff can be viewed as both a devastating human event and a cost-cutting measure to increase profits for the next quarter. In general, however, a bad economy means a bad market – which is why the current situation seems so strange.
Last year, a sharp one month decline was followed by a sharp rebound, despite the fact that the labor market – and everything else in the world – remained deeply uncertain.
By comparison, stock prices fell for about two years around the early 2000s recession. In 2008, at the start of this recession, the S&P 500 slumped for 16 months.
The wealth gap in the United States was already widening in 2020 with the pandemic. Thirty years ago, the top five percent of Americans controlled just over half the nation’s wealth. By last year that number was approaching two-thirds of prosperity, and given the economic development in 2020, it would not be surprising if that threshold were exceeded.