Market Overview
The billionaire bulge
The Federal Reserve publishes a report every three years on family incomes and net worth and the one that came out in September had some hidden messages we need to understand better. But we have the Little Orphan Annie decoder pin (you have seen A Christmas Story, haven’t you?) so let’s save you from the strains of a) reading the report or b) ignoring it.
There’s wealth …
The whole 42-page bulletin is a thick stack of statistics which nobody has time for but, if math was never your thing, we’ll share a bit about stats that’s important to note here: There are two kinds of averages. The mean is the one you’re probably thinking of – you add up all the numbers and divide by the number of numbers; if Sue has 3 pineapples, Bob has 8 pineapples and Maria has 10 pineapples, on average they have 7 pineapples (3 + 8 + 10 = 21; then 21 ÷ 3 = 7). The other is the median. It’s just the number in the middle, so in this example the median is 8. And, in most normal distributions, the mean and median will be fairly close. But there’s little that’s normal about how wealth is distributed in America, or around big chunks of the whole world, to be honest.
It took CNBC almost six months – no lie – to report on this survey, but here’s what the leading business news outlet had to say.
“The median net worth of Americans between ages 55 and 64 is $212,500,” Megan DeMatteo reported, then helpfully noted, “The [mean] net worth, which tends to skew higher due to high-earning outliers, is $1,175,900.”
While that gap might seem a little off-kilter – like almost a million bucks off-kilter – it’s actually getting smaller. Median net worth grew 18% while mean net worth eked out only 2% growth, suggesting that, while the rich aren’t getting any poorer, a big swath of the rest of Americans are finally getting a long delayed payday.
The high tide that lifted an impressive number of – admittedly not all – boats was a confluence of higher home prices and a surging stock market. Families’ net worth benefited from a 5.2% nationwide rise in home values as well as an 11.5% per year gain in equities. Of course, not everyone owns their home; still, two-thirds do. Even fewer hold stocks, whether directly or through funds or ETFs. The proportion is inching up, but a lot of families got out of stocks in 2008 and 2009 – and never got back in.
“Wealth continued to increase among families with either a high school diploma or some college,” according to the Fed survey. “However, families without a high school diploma, which saw the largest proportional gains in median and mean net worth between 2013 and 2016, saw the largest drops between 2016 and 2019.”
It goes on to indicate that “less than 40 percent of families in the bottom half of the income distribution were in a retirement plan, compared with more than 80 percent of upper-middle-income families and more than 90 percent of families in the top decile of income.”
… and there’s income
“Between 2016 and 2019 … the income distribution narrowed slightly … particularly as the decrease in mean income was mainly driven by families in the top 1 percent of the income distribution,” according to the Fed report. “These patterns stand in contrast to the 2010–16 period, during which mean income growth vastly outpaced median income growth and the income distribution widened considerably.”
Both wealth and income inequality in America expanded under Barack Obama and shrank under Donald Trump. But the fact is, between 2016 and 2019, families at the top experienced a sharp decline in income and a mere rate-of-inflation level of growth in wealth while lower- and middle-income families saw modest gains.
We’ll see if this lasts. The report refers to the preceding six years as a period of “outsized” gains for the wealthy, and the time data set precedes the effects of the Covid-19 pandemic and its economic impact.
The good news is that the new work-from-home reality has sent housing prices to the moon. If your family had already been on at least that rung of the economic ladder – owning a home - you’re in clover. The stock market, meantime (meanwhile?), bounced back quickly from its big plunge in the early days of the pandemic and has been humming along just fine for most of the last 12 months. And if the federal minimum wage increase becomes law, that may also shift dollars from the top of the pyramid back down to the base. Other elements of the Biden administration’s wish list – road-and-bridge projects, rural and inner-city broadband, student loan forgiveness – are also likely to inject cash into the middle of the economy.
So, is there such a thing as “trickle-up” economics? Politicians and policymakers in Washington are betting trillions of dollars that the answer is “yes”. What’s the likelihood of a sustainably more prosperous middle class if it works? What’s the fallout if it doesn’t? And how should each of us be investing in our portfolios in response? To help you answer tough questions like these, it’s good form to consult a financial advisor.
