The Stock Market and Inequality

October 27, 2014

Inequality is a popular topic these days. President Obama has called it a “defining challenge of our time.” A French economist, Thomas Piketty, wrote a book on the topic that became a best seller. Despite all the discussion, there still isn’t a consensus on the extent or cause of inequality.

The Wall Street Journal reports on new research that shows one possible cause of inequality growth might be the way people responded in the wake of the financial crisis and the slow recovery.

“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.”

Additional research found that while the bottom 90 percent were selling off with the stock market down, higher income households were doubling down.

“Households with the highest education and strong portfolios to begin with were likely to keep buying stocks during the decline, they found. 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 chart below shows stock ownership by income group and a corresponding share of wealth.

For more information, read the entire article here.


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