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The Simple Thing Trump Doesn’t Understand About The Stock Market

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“The shares belong to everyone,” Trump said during Tuesday’s mayoralty on ABC. “Look, we’ve got a huge thing in the stock market, and that’s good for everyone, but people who aren’t rich own stocks and they have 401 (k).”

In truth, millions of Americans cannot feel the stock market boom.

Just over half (52%) of American families have some level of investment in the market, mostly through 401ks and other retirement accounts, according to the Pew Research Center. Only 14% of households are directly invested in the market.

“To hold the stock market as the barometer of the evolution of the middle class is totally wrong – and very misleading,” Edward Wolff, a professor in New York who has studied share ownership and inequality, told CNN Business.

Trump argued that the sharp rebound in the stock market is not just helping “grown-ups”.

“It affects everyone, it affects a person who owns $ 10,000 in stock in IBM or whatever,” Trump said at mayoralty.

But wealthy Americans have a lot more skin in the stock market. This means that when stocks increase (or decrease), the impact goes disproportionately on the wealthiest families.

Bankruptcy filings are increasing.  And that's just the tip of the iceberg
In the first quarter of 2020, the richest 10% of U.S. households owned 87% of all stocks and mutual funds, according to the Federal Reserve. That’s an 82% rise in 2009 when the last bull market started.

The middle class, defined as households with between 20% and 80% of wealth, held only 6.6% of outstanding shares, according to Wolff’s study.

“The performance of the stock market is so out of touch with the economic experience of the vast majority of Americans – especially the middle class,” Wolff said. “Most Americans don’t really have much interest in the stock market.”

The S&P 500 is not Main Street

In any case, the stock market is not – and never has been – the economy.

The S&P 500 is not a proxy for Main Street. It represents the fortunes of some of the world’s largest companies, those with the most resources to weather a crisis.

Here's why some state economies recover faster than others
And Corporate America can continue to make a lot of money even when the small restaurants and hardware stores on Main Street go bankrupt. The difficulties of small businesses can increase the market share of Home Depot (HD) and owner of the Olive Garden Darden Restaurants (DRI), each of which is part of the S&P 500.

Sometimes the stock market can feel completely out of touch with the fundamentals of the real economy.

For example, the S&P 500 is now at record highs even as unemployment remains high in the United States and bankruptcy cases mount.

The trust factor

This disconnect is due in part to the unprecedented actions of the Federal Reserve. By lowering interest rates to zero – and promising to hold them for a long time to come – the Fed is forcing investors to bet on stocks.

Investors also tend to smell an economic recovery long before Main Street can feel it.

Whatever the catalyst, Wall Street’s rapid recovery has significant advantages.

The best stock of the S&P 500 turns 105

The fact that the S&P 500 has soared more than 50% since the March 23 low helps inspire confidence in C-Suite executives. And that confidence can inspire more hiring and spending in research and factories that boost the real economy.

Likewise, consumers – especially those with large amounts of inventory – can learn from the market. While collapsing markets can pull Americans back, headlines on record stock prices can do the opposite. Consumers who are more confident may choose to spend more money on iPhones, home repairs, or vacations. And this has a real economic advantage.

Black households own only 1.6% of shares

Yet stocks are a particularly poor indicator of the financial health of average Americans, especially racial minorities.

Black households own just 1.6% of stocks and mutual funds, according to the Fed. Hispanic families owned the same amount. By comparison, white households control 92% of stocks and mutual funds, the Fed said.

There is also a deep divide in the educational spectrum.

The stores have ended the risk premium for their workers.  They're still spending hundreds of millions to buy back their shares

Americans with no college education own just 5.4% of stocks and mutual funds, according to the Fed. This is down from nearly 17% in 1989.

All of this means that the stock market boom is amplifying the inequality divide that has helped fuel the unrest in the United States in recent months.

“It widens the gap between the upper groups and those in the middle. It exacerbates inequalities in wealth,” Wolff said.

That’s why the next president is unlikely to tie into the vagaries of the stock market to the extent that Trump has.

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