Investing

Only 55% of Americans own stocks: Here's why investing is 'crucial,' according to an expert

Since the 1970s, both income inequality and the stock market have been on the rise. Is the market to blame for the rise in income inequality, or can it be an equalizer?

Twenty/20

It's never been so cheap or easy to invest in the stock market, but the percentage of Americans who do so hasn't increased in the past decade — and they're missing out on one of the most significant ways to grow wealth.

As of June, 55% of Americans own stocks, either individual ones or through a mutual fund or retirement account, and that percentage has basically held steady in the past decade, according to surveys conducted by Gallup. During that time, however, the S&P 500 has tripled in value. Nearly half of the country hasn't benefited from this surge in stock prices.

More recently, noninvestors have once again missed out on the market's latest surge, even if that has seemed to be out of touch with reality to some people.

After tumbling nearly 34% from an all-time high in February to a low in March, the S&P 500 now is about 7% below that peak, and the Nasdaq Composite (made up largely of tech stocks) has notched new records. Meanwhile the coronavirus pandemic sent the economy into a recession; there are more than 19 million Americans still receiving jobless benefits; the unemployment rate is nearly three times what it was earlier this year; and companies ranging from mall staples to mom and pop shops are going out of business. Not to mention that the number of Covid-19 cases is rising again.

"There is a disconnect between Wall Street and Main Street, and we would like over time for that to narrow," Nela Richardson, investment strategist of Edward Jones, recently told Grow. Though stock prices are almost back to their pre-pandemic levels, it's "really crucial" for people to start investing, even with small amounts, to enjoy the same benefits when the market goes up over time, she adds.

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Nearly half of U.S. adults don't see any boost to their income when the market goes up, while the people who benefit most are high earners, Americans with a high net worth, and White households, according to reporting by CNBC. The contrast in stock ownership by income is especially stark. In 2016, 93.6% of the top 10% of American households by income owned stocks, either directly or indirectly, while less than 30% of the lowest-income families did, according to the most recent data from the Federal Reserve's Survey of Consumer Finances. 

Investing allows people to grow their wealth faster than simply saving it, and that's boosted further by the power of compound interest  — or the interest you earn on your money, plus the interest it's already accrued. Since the 1920s, the S&P 500 has delivered average annual total returns of about 10%. The top savings accounts currently offer average rates just under 1.1%, according to DepositAccounts.com.

Even though the stock market doesn't represent the economy, investing is a crucial way to improve your own economic situation. Here's why it's so important. 

The market and income inequality 'appear to be correlated'

Income inequality in the U.S. has been rising sharply since the 1970s. During that same 50-year period, the stock market also has seen huge gains.

So, has the stock market contributed to that income inequality? "It certainly seems like a factor," says Michael Owyang, an economist and assistant vice president at the Federal Reserve Bank of St. Louis. He co-wrote a paper on the topic in 2016: "Taking Stock: Income Inequality and the Stock Market." 

Owyang concluded, based on his research, income inequality and the stock market "appear to be correlated over a very long term," meaning they move in the same direction. Still, there's not enough evidence of a causal relationship, or that market gains alone create greater inequality, he adds. 

"There are a lot of things that can contribute to income or wealth inequality," Owyang says, including whether someone is a homeowner or renter, for example. For wealthy households, income encompasses the amount of money they earn from working plus capital gains. By contrast, wages are typically the sole source of income for low income households, he adds.

"Participation in the stock market allows people with higher wealth to essentially have their money working for them in a sense," he says.

That said, investing can cut both ways, Owyang notes. Gains in stock prices benefit the wealthy, but these people also are disproportionately affected by financial crises, like the Great Recession of 2007 to 2009.

Participation in the stock market allows people with higher wealth to essentially have their money working for them in a sense.
Michael Owyan
Economist and assistant vice president at the Federal Reserve Bank of St. Louis

The Fed's economic efforts may represent a 'moral hazard'

The cornoavirus pandemic has both exposed and exacerbated the economic inequality in the U.S. While the federal government has offered unprecedented support, in the form of extended unemployment benefits, small business loans, and stimulus payments, there has been criticism about the assistance from another government entity: the Federal Reserve.

The wealth gap in the U.S. had never been as bad as it was before the pandemic struck. That event, along with some of the central bank's actions, will further accentuate income inequality, some people argue. Since February, the Fed has taken unprecedented action to support the economy and the financial markets, including slashing interest rates to near zero, and buying a variety of assets like bonds and exchange-traded funds (ETFs).

The central bank's actions, rather than what was happening in the economy, fueled much of the market's rally, Richardson notes. "The reason why the markets have been optimistic is because of the Fed. People are not looking at the unemployment rate and cheering that."

Whatever the reason for the surge, investors benefit while noninvestors don't. And a risk for the Fed is what's known as "moral hazard." While the central bank may have good intentions, in other words, its actions could encourage risky behavior that pushes the stock market higher but doesn't get money to the people who need it most.

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When Fed Chair Jerome Powell testified before Congress in June, Senator Sherrod Brown, a Democrat from Ohio, asked: "What are you doing to make sure the Fed's response does not make the existing inequality in this country even worse?"

In response, Powell said a strong labor market "is probably the best single thing that the Fed can do to support gains by all low and moderate income communities and particularly for minority communities who are heavily represented in these groups. Everything we're doing is to try to get the labor market back to where it was in February of 2020."

Still, a return to the pre-pandemic labor market doesn't address the fact that nearly half of Americans are missing out on another way to build wealth by investing in the stock market. "Monetary policy gives support to the financial markets that does not lend as much direct support to income gains," notes Mark Hamrick, senior economic analyst at Bankrate.

"Wealth begets wealth," Hamrick adds, and for people who are lacking wealth, the primary means for obtaining it is through work.

Wealth begets wealth.
Mark Hamrick
senior economic analyst at Bankrate

Investing can be a way for everyday people to build wealth

Looking at who benefits most from the rising stock market, is investing an answer to the problem of rising inequality? That's not an easy solution to a complex problem, both Hamrick and Owyang say.

"I'm not sure if it's appropriate to view it as a symptom or a cause," Hamrick says, adding that people should not divert income that would otherwise be used for necessities into the stock market. "Given the fact that we know Americans are under-saving for emergencies, putting short-term savings into realms where they cannot easily access it is not a good idea."

"Investing more doesn't imply investing wisely," Owyang adds. What's more, when the stock market does endure the short-term fluctuations like we've experienced this year, wealthier people often have the means to ride that out, whereas lower income Americans often "don't have that safety net of savings," he says.

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Still, investing is one of the things that can help people to achieve their financial goals, Hamrick says. Bankrate surveys over the years have shown that the top financial regrets for Americans are not saving for retirement sooner and not having enough money saved for an emergency.

Experts recommend an emergency fund that can cover at least three to six months worth of expenses. And then, with any leftover savings, you can start making small investments in the stock market to build your wealth, and gradually increase that amount over time.

"It's prudent to look at stock investing, or investing more broadly, as something that's consistent with the idea of achieving your financial goals," Hamrick says. "In an ideal world, a larger number of Americans would have greater flexibility with their finances that they could invest in the stock market."

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