Trump Touches Record Stock Market Performance, But Who Benefits?
Donald Trump loves to herald the success of the US stock markets as a key achievement of his presidency, and on Tuesday, during his annual message to the joint session in the US Congress, he was in a state of utter complacency.
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«All of these millions of people with 401 (k) (the popular US private pension plan) and pensions are doing much better than ever before, with increases of 60, 70, 80, 90, 100 percent and more.», – Trump said in his address to a joint session of Congress.
While retirement savings have increased thanks to the rise in stock markets, the president avoided talking about one key point – who really wins when the market rallies: most of the profits go to a small fraction of Americans who are already wealthy..
This is because 84% of American households are owned by the richest 10% of Americans, according to a 2016 Federal Reserve analysis by Edward Wolff, professor of economics at New York University. Therefore, when the stock market began to grow rapidly – for example, almost 30% growth in the S index&P 500 in 2019 – the reward goes first to those people who are already wealthy.
«For most Americans, the rise in stock prices is quite immaterial to their well-being.», – said Wolf, who published an article on wealth inequality in the National Bureau of Economic Research in 2017.
Roughly half of Americans hold some stock through a brokerage account or pension funds. But for most people, their investment is too small for market gains to change their lives or leave them with a much better understanding of their finances, Wolf said.. «They will see a slight increase in their wealth, but this will not be anything special.», – he said.
What's more, nearly 90% of families holding shares do so through a tax-deferred retirement account, which means they cannot access the money until they reach retirement age unless they pay the fine, Wolf said..
According to an analysis by the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis, most corporate stocks and mutual funds are held by white, college-educated investors over the age of 54..
The typical middle-class family derives most of their wealth from the housing market. According to Wolf's analysis, households in the middle three wealth quintiles held 61.9% of their assets in their primary place of residence in 2016. This compares with households in the top 1%, which kept 7.6% of their wealth in their homes..
Since most consumers accumulate most of their wealth through their homes, rising property values could provide more substantial increases in household wealth than a rally in the stock market, according to William Emmons, lead economist at the Center for Household Financial Stability in St.Louis..
However, the recent rally in the real estate market, fueled in part by the Federal Reserve's interest rate cut, is not helping all Americans the same. Rising property prices benefit homeowners but make it difficult for new home buyers to enter the market, said Eugene Steuerle, co-founder of the Center for Tax Policy, a joint venture between the Urban Institute and the Brookings Institution..
And some people who bought homes just before the start of the recession may still be trying to recoup their losses, Stoyerle said. Their wealth may have been wiped out by foreclosures, which means they struggled to qualify for a new mortgage during the rebuilding, he said..
This is in stark contrast to wealthy investors, whose overall wealth has risen since the crisis thanks to high returns on stocks, real estate and other investments. According to an analysis by Oxford Economics, about 72% of the wealth accumulated between the third quarter of 2009 and the third quarter of 2019 came from the richest 10% of households. Over the same period, 50% of the poorest families received only 2% of the wealth gain.
«There are many families who have not yet recovered from the financial crisis», – said Emmons.
Further evidence that the recent stock market boom is not making everyone feel wealthier: There was little evidence «wealth effect», which suggests that people tend to spend more when stock markets rally, says Lydia Boussour, senior economist at Oxford Economics.
After the recession, people basically continued to increase their savings even as the stock market rose.. «Consumers are much more careful», – she said.