Rising Stock Market Doesn’t Lift All Income Earners

A healthy stock market signifies a healthy U.S. economy and vice versa - correct?

With the Dow Jones Industrial Average setting a series of record highs in recent weeks and seemingly on course to surpass the 30,000 mark, the historic surge is being pointed out as a sign - if not the sign - of U.S. economic might.

President Donald Trump repeatedly tweets the Dow Jones record highs, as well as those of the S&P 500 and Nasdaq, as key reasons why he should be reelected. Democrats counter that the economy was already on an upswing before Trump took office and that financial benefits have been unevenly spread.

Individuals who invest in their company 401(k)s likely have experienced a sizable boost in the value of their portfolio in recent years.

The richest 1% of Americans, who can afford to place high-dollar bets on corporate financial and stock performances, benefit most from stock-market record run-ups, whether individually or through hedge- and mutual-fund investments.

According to National Bureau of Economic Research, the richest 1% - those with annual household income of at least $420,000 - own 40% of all stock traded in the U.S. The richest 10% - those with annual household income of at least $166,200 - own 84%.

The Federal Reserve, in a third-quarter 2019 report, determined that the richest 1% of Americans hold 54.2% of all stock and the top 10% own 88.1% altogether. The bottom 50% own 0.08%.

The Fed also determined that as of Sept. 30, about 92% of stock owned in the U.S. is held by whites, followed by "other" at 4.4%, Hispanic at 1.9% and African Americans at 1.5%.

Non-Hispanic whites represents 62.6% of the U.S. population, followed by Hispanics at 15.1%, blacks at 13.4%, Asians at 5.9%, Native American and Alaska Natives at 1.3%, and other races at 1.7%, according to U.S. Census Bureau.

The Economic Policy Institute said in its "State of American Retirement Savings" report that 70% of those in top 20% of earners ages 32 to 61 participate in a 401(k) plan at work.

That's compared with 62% of those in the top 21% to 40% of earners, 48% of those in the top 41% to 60% of earners, 33% of those in the top 61% to 80% of earners, and 10% of those in the lowest 20% of earners.

The institute said it chose the 32-to-61 age group to measure because that is "when most families should be accumulating pension benefits and retirement savings."

Wealth concentration

Those top 1% and top 10% investors have been rewarded particularly from the massive amounts of corporate share repurchases since Congress approved and Trump signed into law the corporate tax-rate cut from 35% to 21% in late 2017.

An analysis of Fortune 500 companies found that just 20% of increased cash flow in 2018 was spent on increasing capital expenditures or research and development. The remaining 80% went to investors through buybacks, dividends or other asset planning adjustments.

Bloomberg News reported that 56% of corporate profits in the U.S. go toward share buybacks.

"This divide between the performance of stocks and what working North Carolinians see in their paychecks is a fundamental economic problem at the root of so many families' financial struggles," the liberal-leaning N.C. Justice Center said in a report released Jan. 17.

"While the stock market more than doubled in value since January 2010 when we were just exiting the Great Recession, wages for working North Carolinians have hardly budged," the center said

It said the hourly wage in November 2019 was $4.70 higher than at the start of the decade, without considering inflation, "which wipes out virtually all of that increase."

By comparison, the Justice Center determined that $10 million in stock of companies in the Dow Jones index in 2010 would be worth more than $17 million now.

"As far too many working North Carolinians know, pointing to increasing stock prices as evidence of economic health has nothing to do with the reality on the ground," the Justice Center said. "The last two years have only exacerbated and continued a decades-long trend of stock wealth concentrating in fewer and fewer hands."

Middle-class gains

A company typically buys back its shares from the marketplace to reduce the number of outstanding stock shares.

Because there are fewer outstanding shares, those remaining can become more valuable.

"Of course, money used by a corporation to buy back shares is money no longer available for investment, upgrading or expansion, as well as unavailable for paying higher wages to employees," said John Quinterno, a principal with South by North Strategies Ltd., a Chapel Hill research firm specializing in economic and social policy.

"In many ways, it can be thought of as a transfer of resources from the firm as a whole to a small group of executives. More extreme critics often describe buybacks as a form of looting on the part of a company's executives," Dow Jones Index

Mitch Kokai, policy analyst with the John Locke Foundation, a conservative-leaning research group based in Raleigh, said that while executives and wealthy investors gain the lion's share from share repurchases, the initiatives help workers as well.

"It's important to remember that a corporate tax-rate cut benefits real people in three different ways," Kokai said. "Consumers can end up paying less for a product or service. Workers can get paid more. Shareholders can reap greater returns.

Those shareholders "aren't just the rich," Kokai said. "They include middle-class families with 401(k)s and other retirement investments.

"Those benefits will play out differently for different companies, but it's a mistake to think of the corporate tax-rate cut as benefiting some faceless business entity."

Share buybacks

There were some high-profile announcements in late 2017 and early 2018 of corporations raising their minimum hourly wages to a range of $12 to $15, or employees receiving a one-time bonus of up to $1,000.

Several corporations with Triad ties participated, such as Amazon Inc., BB&T Corp. (now Truist Financial Corp.), First Horizon Corp. and Wells Fargo & Co.

However, just 4.3% of workers nationwide - 6.8 million people - received a wage increase or a one-time bonus tied to the corporate tax cuts, according to Americans for Tax Fairness.org.

Wells Fargo declared on Jan. 14 that it had spent $7.37 billion on share repurchases just during the fourth quarter of 2019. The bank plans to spend up to $23.1 billion on share repurchases for the 12-month period that began July 1, 2018. So far, it has spent $14.81 billion under the plan.

Share repurchases have been Wells Fargo's main incentive to investors since a Federal Reserve order, issued Feb. 3, 2018, prohibiting the bank from increasing its total assets beyond the $1.93 trillion it had on Dec. 31, 2017.

BB&T said in June 2018 that it would repurchase as much as $1.7 billion worth on its shares from July 1, 2018, to June 30, 2019. In fiscal 2018, BB&T repurchased 23.2 million shares of common stock for a total value of $1.2 billion.

The buyback, however, was suspended when BB&T announced plans in February 2019 to buy SunTrust Banks Inc. and form Truist Financial Corp.

Another example: Bank of America Corp. reported on Jan. 15 spending $5.1 billion on share repurchases in fiscal 2016. The amount was up nearly 5½ times in fiscal 2019, at $28.1 million.

The surge in share repurchases was in part a reward to stakeholders who invested and stuck with Bank of America during its share-price decline during the Great Recession. The share price hit a low of $4.89 in February 2009 and was at $5.44 as recently as December 2011. It rebounded to a 12-year high of $35.72 a share on Dec. 27.

Executive compensation

Several economic studies since the corporate tax-rate cut went into effect have found that corporate spending on expansion, hiring and equipment has slowed significantly.

The nonpartisan Tax Policy Center wrote that "this slowdown in business purchases of plant and equipment contrasts sharply with President Trump's rosy forecast of a long-term investment boom that would lead to annual wage increases of $4,000 or more."

According to Investopedia, a financial-information website, the biggest social concern about corporations choosing share repurchases over reinvestment is that "on average, fixed assets and consumer durable goods in the United States are now older than they've been at any point since the 1950s."

"There is a lot of attention paid to the nation's crumbling roads and bridges, but the private infrastructure is also suffering neglect - it's just not talked about," Investopedia said.

Another factor is that chief executives' compensation has been increasingly tied to stock performance in terms of deferred stock and stock-option awards.

For example, in the Winston-Salem Journal's seventh-annual review of annual corporate and nonprofit executive compensation, stock and stock-option awards represented just under 60% of the combined $233.9 million of the total compensation for the 30 executives listed.

"So C-suite executives have little incentive to scale back on buybacks, given the large positions in company stock they typically hold and therefore amount they have to gain," Investopedia said. "By increasing the demand for a company's shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings-per-share targets."

Business Roundtable initiative

Putting more emphasis on employee and community well-being is at the heart of a new corporate initiative signed in August by 181 members of the Business Roundtable.

Among the signatures include nine chief executives with significant current and future workforce in the Triad: Doug Parker, American Airlines; Jeff Bezos, Amazon; Brian Moynihan, Bank of America; James Umpleby III, Caterpillar; Lynn Good, Duke Energy; Frederick Smith, FedEx; Gerald Evans, Hanesbrands; Samuel Allen, John Deere; and Gregory Hayes, United Technologies Corp.

The initiative comes in the form of the latest statement on the Purpose of a Corporation that the roundtable has issued periodically since 1997.

Previous statements have endorsed principles of shareholder primacy - that corporations exist principally to serve shareholders who are putting their capital at risk in making investments.

The roundtable participants committed to: delivering value to our customers; investing in employees, including "compensating them fairly and providing important benefits," such as training and education that help develop new skills; dealing fairly and ethically with suppliers; supporting the communities they have a presence in; and generating long-term value for shareholders.

Michael Walden, an economics professor at N.C. State University in Raleigh, said the roundtable statement reflects the fact that generating a return for shareholders can have different meanings to different investors.

"Some may be willing to sacrifice some rate of return for returns from 'social causes' - education, neighborhood revival, environmental preservation," Walden said.

"The challenge for corporations is to please enough stockholders so as to support the price of the stock. There may be many stockholders who are committed to social causes, but prefer to make their commitment through charities, rather than through their investments," he said.

"In this situation, corporations pursuing social goals at the expense of some returns to stockholders may suffer from declining stock values - which could completely negate the financing of their social efforts," Walden said.

Inherent inequality

Money Crashers, a financial-education firm, said in a Jan. 15 report that share repurchases are a symptom of why "stock market booms can exacerbate inequality" - and not just between high-income and low-income earners.

Its research determined that 92% of individuals making $250,000 or more annually invest in the stock market, compared with fewer than 30% of those making less than $20,000 annually.

Another socio-economic breakdown: 75% of individuals with a post-graduate degree have stock-market investments, compared with 69% of those who have a bachelor's degree and 32% who have a high-school degree.

"Middle-income people expressed concerns about the stock market, too," according to the report. For the report, middle-income people had annual household income in the range of $50,000 to $149,999.

"They say they are reluctant to invest because they feel like they don't have enough savings (43%), they fear losing money (41%), or they don't have trust in the economy (25%)," the report said.

"With more money invested in the market, richer Americans grow their treasure chests, while uninvested Americans stay the same."

Money Crashers said inequalities created by the stock market tend to be overshadowed by other factors, such as technology and globalization replacing many middle-class jobs, as well as the decline in representation by organized labor and individual federal tax-rate policies.

"On the one hand, the stock market is one of the greatest drivers of economic growth and wealth," the firm said. "It allows companies to raise capital from the public, and it allows investors to purchase shares of businesses in order to get a slice of future earnings.

"On the other hand, it only benefits those with a seat at the table. People who don't invest are left behind."

Money Crashers said the reality of a capitalist society is that "a certain level of inequality is inherent."

"The question is: How much is too much? How can access to financial vehicles be open to more people so that they can grow their wealth?" it asked.

"How can more Americans benefit from the country's economic engine?"

[email protected]@rcraverWSJ