Feb 8, 2023
Bull Case on a Stock Crash Sees End of Fed Gifts to One Percent
(Bloomberg) -- One of many things to break in last year’s market rout was a decade-long stretch in which gains in stocks overwhelmed gains in wages.
Whether that modest blow for equality lasts will hinge on how the economy evolves amid the toughest Federal Reserve tightening campaign in 40 years.
It’s a signature irony of an inflation-ravaged world. At a time when rising consumer prices gutted the wallets of American laborers when it came to putting food on the table, rising wages helped their affluence jump when measured against a more abstract set of assets: publicly traded shares. As salaries went up and stocks fell, wage-based buying power versus equities expanded by 25%, by one estimate.
A pointless victory? Perhaps, although consider it next to half a century in which the main channel of personal enrichment in America has shifted mercilessly toward ownership and away from hourly pay. In 1980, a week’s wages at the then-minimum of $3.10 an hour bought shares of the S&P 500 that it would take 3 1/2 months to pay for now, according to an analysis by StoneX Group Inc.
This is a lens through which inflation and the Fed’s response take a different tint, one where a consequence viewed by most investors as unambiguously bad — that it hammered asset prices — is framed as a benefit. After years of loose money put many things out of reach for ordinary Americans, the argument goes, its reversal has started to do the opposite: bring financial assets back into the realm of the affordable.
“These gains were strongest for the workers who suffered the most under the old regime: the young, the least-educated, the poor, and minorities,” wrote Vincent Deluard, StoneX’s director of global macro strategy at the firm. “The process which started in 2022 cannot — and should not — be reversed.”
Delaurd’s views will strike many as frivolous or simply wrong, going against many accepted ideas, among them that rising markets are desirable because they raise societal wealth. That he claims to find a wealth-redistributing benefit in inflation — a tax that lands hardest on the poor, a group struggling to buy food never mind stock — is also away from the mainstream.
“The worst that can happen to an economy is inflation. It destroys everything,” Jim Bianco, founder of Bianco Research, said in an interview. “It’s a tax that hits everybody equally bad. It reduces everybody’s purchasing power. Your dollar will buy you less in a year because of inflation, whether that dollar is owned by Elon Musk, or whether it’s owned by somebody on public assistance,” he said. “It needs to be stopped by whatever means possible.”
Another dissenting view holds that tighter money is a multiplier of wealth inequality because of its impact on the affordability of real estate. By raising mortgage rates, restrictive Fed policy “appears to prevent many lower-income families from buying homes,” wrote Federal Reserve Board Economist Daniel Ringo in a new working paper.
Still, the degree by which stocks have outrun wages has been a defining fact of American economic life for more than a generation and became a cause in certain circles back when Fed stimulus was inflating equities while doing less for worker pay. Whatever else is true of the economy’s recent run-in with inflation, it has begun to take a nick out of the disparity. In the four decades through 2021, the S&P 500 returned 11.9% a year, compared with a 3.28% increase in the average hourly earnings by employees tracked by the Department of Labor. After last year, the gains were 11.2% and 3.32%.
Deluard’s view is that the current tightening may be the first break in a long cycle where the Fed rushed to the aid of an already-affluent investing class at every sign of trouble. One way the disparity could narrow is if — somehow — the robust growth in wages that has occurred in the last two years survived a Fed onslaught that kept a lid on assets.
“There is a way that inflation can rebalance wealth and income to make society more equitable — if inflation is driven by wages, and especially low-end wages, then inflation could be a solution,” he said. If pay outpaces inflation, corporate margins will shrink, “and you’ll see an inversion of the past four decades of insane wealth concentration, and soaring asset prices and stagnant wages.”
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Many things contributed to workers falling behind, including globalization and the waning of unions, according to Dean Baker, senior economist at the liberal-leaning Center for Economic and Policy Research, though the Fed is one of the bigger reasons. The minimum wage used to keep pace with productivity up until around 1968, meaning that lower-earning workers benefited from economic growth and their wages kept pace with prices. Since then, wages haven’t kept up — had they, the minimum pay today would be around $25 an hour, Baker calculates.
The federal minimum wage currently is $7.25 an hour, a number that hasn’t changed since 2009.
“The Fed has played a big role, at least in my view, in terms of workers falling behind,” he said in an interview, though he commended Chairman Jerome Powell for paying a lot of attention to the issue. There were periods, he says, when the Fed raised interest rates at the smallest inkling of wages going higher, even if inflation had been tame at the time.
While the Fed’s easy monetary policy since the global financial crisis wasn’t directly geared toward making equity owners rich, it contributed to a widening wealth gap among Americans, according to Peter Cecchini, director of research at Axonic Capital.
“That was a partial unintended consequence,” he said. “The Fed knows well that the wealth effect is one transmission mechanism for policy. So, if it made equity holders richer for the benefit of the greater good, then I guess that was OK. Now the opposite has happened with Fed policy tighter and likely to remain tight.”
While stock ownership rates among the lowest-earning workers have gone up over time, they remain tiny compared with rates of those with higher incomes. Less than one third of lower-income families participate in the stock market, compared with about 70% of upper-middle-income ones, and more than 90% of families in the top decile of income distribution, according to a 2019 paper by the Federal Reserve.
There are big differences in the value of their holdings. That year, the Fed found, the median value of all financial assets held by families was $25,700, while the mean value was around $363,700. And the median value of stock holdings for the bottom half of the income distribution was about $10,000, versus $40,000 for the upper-middle-income group and roughly $439,000 for the top income decile.
About 58% of Americans report owning equities, according to a Gallup poll from last spring, down from when it was more common between 2001 to 2008, when an average 62% said they did. That indicates ownership fell after the financial crisis and hasn’t recovered. The same survey found that nearly 90% of those making $100,000 or more said they have money in the stock market, while just 25% of those making $40,000 or less said they do.
“We had tremendous inflation in asset prices, equities had a tremendous bull run since 1980,” said Chris Gaffney, president of world markets at TIAA Bank. “It’s great for those investors who own those assets, obviously, but it is a drag on those that missed out or didn’t have the opportunity to invest in the markets.”
--With assistance from Reade Pickert.
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