Millions of Americans inadvertently made a classic
investment mistake that contributed to today’s widening economic inequality:
They bought high and sold low. Late in the stock-market booms of the 1990s and
2000s, more U.S. families clambered into stocks as indexes surged. Then, once
markets tumbled, many households sold and took losses.
Those that held on during the most recent collapses reaped
the benefits as stocks nearly tripled between 2009 and today. The split path is
one driver of stark inequality in the U.S. Many workers have seen their wealth
and incomes drop despite more than five years of economic expansion in the U.S.
Some fear the gap, widening for decades, could fracture society and slow the
nation’s potential for economic growth in the long run.
With markets again gone wobbly after a half-decade surge in
stocks, the pattern threatens to repeat. The S&P 500 index closed down as
much as 7.4% from its mid-September peak until mid-October, unsettling some
investors.
New research from the Federal Reserve and the University of
Michigan shows the role that panic about the market played in widening wealth
inequality.
The Fed’s Survey of Consumer Finances shows that among the
bottom 90% of households by wealth, families bailed out of the stock market
between 2007 and 2010—the central bank’s study is conducted every three
years—and between 2010 and 2013. The total share with stockholdings declined by
4.4 percentage points. That’s the equivalent of 5.4 million households selling
stocks, even as the market rebounded. Only households in the top 10% have been
increasingly likely to own stocks.
To be sure, some households that sold stocks had little
choice.
The 2007-2009 recession pushed the unemployment rate to 10%
just as equities declined more than 50%. Families struggling with job loss or
mortgage problems may have had no choice other than selling at a loss. But the
data suggest some investors simply sold at the wrong moment.
Households with the highest education and strong portfolios
to begin with were likely to keep buying stocks during the decline. Those with
less education and smaller account balances were more likely to sell during the
downturn. When the subsequent rebound happened, the already rich got even
richer.
The finding holds even after controlling for job loss or
mortgage distress, meaning some families simply sold at the wrong time. Even
those that outearn 80% of other families—an income of about $120,000 a year—are
5% less likely to own stocks now than in 2007, according to the Fed’s survey. The
Fed’s survey suggests many of these households have bailed from traditional
assets and only increased the amount of saving that they are doing in
transaction accounts.
The gains in wealth have especially accrued to just the top
3% of families in recent decades, according to the Fed. Those families held 54%
of wealth in 2013, up from 45% in 1989. The bottom 90% now hold 25% of wealth,
down from 33%.
Wealth inequality in the U.S. has many causes, some of which
precede the recent booms and busts, and the new research doesn’t quantify
exactly how much the stock-market timing contributed to it. The widening gap in
incomes stretches back nearly 31/2 decades. Long-term unemployment rose in the
recession and has yet to recover. And the decline in real estate hit many
middle-class families that stored much of their wealth in their homes.
There are signs that investors may now be returning to
stocks since the latest Fed survey was conducted. Last year was the strongest
for inflows into stock mutual funds since 2004, according to the fund tracker
Lipper.
But history suggests stocks will do well in the long run,
despite their volatility, for those who hang on to the investment. University
of Pennsylvania economist Jeremy Siegel has calculated stocks have returned an
average 6.7% a year over the past two centuries, outperforming bonds, gold and
the dollar. Still, market declines continue to spook some investors into
selling at huge losses.
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