Being an American worker with no stake in the equity market has, by one measure at least, seldom been costlier.
Even though wages are improving, the rate of growth in what companies pay employees pales in comparison to what stocks have handed investors over the last six years. In fact, with equities rising 20 percent annually and wages up 2 percent, the gap has never been wider in any bull market since 1966.
While comparing salary and stock returns has its imperfections, the figures are revealing in a country where six years of cost cuts helped double the Standard & Poor’s 500’s earnings and add $12 trillion to shares. The divergence is a concern when Federal Reserve data show the percentage of families owning stock fell to 48.8 percent in 2013 from 53.2 percent in 2007.
“Earnings have been so strong in part because wage growth has been so weak,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in Philadelphia. “The benefit of any productivity growth is going right to corporate earnings and to shareholders.”
To be sure, record stock prices have helped enrich U.S. households, with net worth climbing to a record $82.9 trillion in the fourth quarter. But it’s a benefit that’s not broadly shared. Among the worst-paid Americans, less than 30 percent of families invest in stocks, compared with 92 percent for the richest, the Fed’s September survey shows.
On the salary side, there are signs purse strings are loosening. Hourly pay was a silver lining in Friday’s monthly jobs report, rising by 0.3 percent from the prior month and 2.1 percent from a year earlier.
Wal-Mart Stores Inc., its stock up five straight years, announced a pay increase in February for 500,000 of its hourly workers. T.J. Maxx, Marshalls and other chains owned by TJX Cos. matched it a week later. On April 1, McDonald’s Corp. said it will raise pay at company-owned locations to at least $1 more than the local minimum wage.
To Michael Shaoul, chief executive officer of Marketfield Asset Management, the gap between wages and stocks since 2009 is partly a statistical illusion reflecting the severity of the bear market and how little wages fell during the credit crisis. Comparing the respective growth rates since 2000 or 2007 shows pay rising more closely with shares.
“A lot of this depends on starting points,” Shaoul, who helps oversee $10 billion at Marketfield, said by phone in New York. “Time is the main ingredient missing with regards to this wage cycle. Many factors are coming back into the employees’ favor.”
While the economy didn’t start adding jobs until 2010, average hourly earnings for non-supervisory positions fell in only four months between 2007 and 2015. Still, that didn’t keep overall employee compensation from sliding to 52 percent of U.S. gross domestic product in 2013, the lowest level in Commerce Department statistics going back to 1948.
Using a 10-year rolling average of stock returns and pay, the gap between the two was higher than it is today during the 1990s technology rally and its immediate aftermath -- a time when equity ownership among U.S. families peaked at 67 percent, according to a Gallup poll published last year. The same survey put ownership now at 54 percent.
“During this cycle, shareholders have benefited considerably more than employees,” said David Kahn, managing director at Convergent Wealth Advisors in Los Angeles. The firm oversees about $8.4 billion. “Margins are near peak levels and we are starting to see some wage gains. Stock prices and nominal wage gains are likely to track much more closely.”
At the intersection of economic growth, sales, earnings and productivity are margins, the profitability indicator that American CEOs last year fattened to record levels. If stagnating GDP mutes revenue growth, it’s possible to sustain earnings by cutting costs -- from capital to commodities to labor.
That’s what U.S. companies did. Operating margins, or income divided by sales, more than doubled among S&P 500 companies to a record 10.1 percent in the third quarter of 2014 from 4.6 percent at the start of 2009, data compiled by S&P Dow Jones Indices show.
Along the way, the productivity of U.S. workers, or employee output per hour, rose at an average 1.5 percent a year. And equities, aided by around $2 trillion in share buybacks, went on the biggest bull run since the Internet bubble.
“The S&P has benefited from the lean and mean mentality,” said Bernard Schoenfeld, the New York-based senior investment strategist at BNY Mellon Wealth Management, which oversees $190 billion. “When we look at the health of the economy, yes, there is a portion that could benefit from higher wages. But fortunately we don’t have such tremendous wage growth as we did in the 1970s, when productivity was slowing.”
Coincidentally or not, the S&P 500’s weakest bull-market gain in the the past five decades occurred during that period, 1974 to 1980, when wage growth was fastest: 7.5 percent a year. With inflation running at an annualized rate of 8.9 percent, the Fed raised interest rates to as high as 20 percent.
In the latest advance, U.S. companies increased earnings 15 percent a year while sales rose 5 percent. As the Fed reduced borrowing costs to record lows, the S&P 500 has rallied 206 percent in six years, roughly matching the average annualized gain in the last seven bull markets. Wage growth, on the other hand, has happened at about half the median rate.
Bigger gains in stocks haven’t done much to lure investors, who are sending 68 times as much money to fixed income markets than equities. Mutual and exchange-traded funds that hold U.S. shares have attracted $18 billion since March 2009, compared with $1.2 trillion that went to bonds, data compiled by Bloomberg and Investment Company Institute show.
“It’s been a huge opportunity cost if you have not been in equities,” said Joe Quinlan, New York-based chief market strategist at U.S. Trust, which oversees about $387 billion. “People worried about their jobs, they had to pay their mortgages. There are a lot of reasons for investors to be risk averse.”