Throughout the 1990s, average Americans have piled into the stock market through mutual funds, 401(k)s, and Individual Retirement Accounts. America's love affair with stocks made small investors a mainstay of the bull market. Many thinkers even have heralded the dawn of a people's capitalism, one that chips away at the elitism of corporate ownership and wealthy individual investors. So when the market heads south, middle-class America gets whacked in the wallet just like the tycoons at the top, right?
Not quite. A new study by New York University economist Edward N. Wolff shows that most Americans don't have enough stock, even including shares held indirectly through mutual funds, to share in much of the gain--or in the pain either. The study shows that the wealthiest 10% of households enjoyed 85% of the stock market gains from 1989 until the end of 1997, when the markets stood at about where they were after the Aug. 31 sell-off, according to Wolff. His study is being published on Labor Day in The State of Working America, a book put out by the Economic Policy Institute (EPI), a liberal Washington think tank.
Says John Ray, an economist at the Investment Company Institute, a trade group of the mutual-fund industry: "It's not terribly surprising that the top 10% has enjoyed most of the gains from the market, because they still have most of the assets in the U.S."
GROWING RANKS. Still, Wolff's study challenges the conventional wisdom about broad stock ownership. It's true that the ranks of small investors have multiplied rapidly: Some 40% of all households owned some stock in 1995, the latest year available, vs. 32% in 1989, according to Federal Reserve Board data. These figures include all stock held directly or indirectly by households.
But that leaves a solid majority of Americans who own no stock. And those families that do invest don't have enough money in the stock market to reward them with a significant share of the total. Just 29% of households own stock worth more than $5,000, Wolff finds.
Or take the middle fifth of households. Their average stock holdings, when adjusted for inflation, have doubled--but from only $4,000 in 1989 to just $8,000 in 1997. And those in the bottom 40% of households owned only $1,600, says Wolff.
As a result, most of the benefits of the 1990s bull market have bypassed average Americans. At the end of 1997, U.S. households owned $5.9 trillion worth of stock, giving them an inflation-adjusted gain of $3.1 trillion since 1989, Wolff concludes. But because middle-class America's stock holdings still amount to so little, the richest 1% of households received 42.5% of that $3.1 trillion (chart). The next wealthiest 9% acquired 43%, leaving the bottom 90% of households to divide less than 15%. The bottom 40% received just 1% of the total. "There were many newcomers to the stock market in the 1990s, but their holdings are still relatively small," says James M. Poterba, an economist at Massachusetts Institute of Technology who also has done studies of stock ownership.
DEBT FACTOR. In fact, the total net worth of average Americans hasn't budged since 1989, despite the bull market. The reason: Most families have taken on additional debt, and that outweighs any stock gains. In 1997, the middle fifth of households had a net worth--assets less debts--of $56,000, down from $58,000 in 1989, after adjusting for inflation, Wolff found.
The same pattern holds even for the 10% of families just under the wealthiest 10%. Their stock holdings averaged $35,000 in 1997, a 40% gain from 1989. But their net worth nonetheless slipped by 6%, adjusted for inflation.
The good news in all this, of course, is that even a further slump in stocks will not directly hurt most families very much. Without question, homes, not stocks, remain by far the biggest financial asset most American families have. So today's complacent inflation and low interest rates are much more important than the stock market to their spending power, points out EPI economist John Schmitt, who helped Wolff analyze the data on wealth.
Many middle-class Americans are still salting away plenty of money into stocks through 401(k)s and other funds. Since a lot of this investment involves long-term savings for retirement, even more bad news from the market probably won't stop the slow spread of stock ownership. But given the still small stake that most Americans have today, true democratization of the market remains many years away.