The Middle Class Is Leaving the (Stock) Market

Last year’s presidential election moved the subject of the sagging American middle class to the fore of national debate. During the post-World War II decades, the middle class was hailed as a backbone of political stability and economic prosperity, and the United States was thought blessed among the nations because its middle class was so large and solid. 

What causes concern now is not just stalled average incomes or rising costs of education and health care relative to those incomes, but the fact that so many previously middle class families are dropping out. They are jumping off the upward mobility ladder, leaving the ranks of savers and even shunning the labor force. Over the past decade, the labor force participation rate fell by three percentage points, to 63.6%. 

In the 1990s, it was a point of pride for economists to talk about the U.S. as a shareholding society, where stock ownership had become a national pastime. Investing into shares of U.S. companies, either directly or through various pension schemes and mutual funds, represented direct ownership of the U.S. economy and a vote of confidence in America’s future.

Plus, equity investing was an important complement to individual retirement savings; over the long run, stocks consistently outperformed all other financial instruments in terms of their returns, providing an additional layer of safety for retirees. 

But the situation began to change after 2002, when stock ownership reached a peak of 67% of U.S. households. Even as the U.S. economy recovered from the dot-com bust, and the Dow Jones industrial average, having reached a recessionary nadir in 2002-03, began to climb toward new all-time highs, the percentage of stock-holding households started to dwindle. It spiked briefly in 2007, but in the current Great Recession it has tumbled rapidly, reaching 54% in 2011—the lowest level since the late 1990s—according to the Gallup poll. 

Prof. Edward Wolff of New York University has found that stock holdings of the wealthiest 1% of the U.S. population jumped from a 33.5% share of all stocks to 38.3% between 2001 and 2007. Meanwhile, the next 19% of the income ladder saw their share of stocks decline by three percentage points, to 52.8%, and the bottom 80% went from a 10.7% share to 8.9%.

All such figures—stock ownership, the share of stocks owned and labor force participation rates—are moving in parallel and pointing the same way: toward a reduction in the number of middle class households and, worse, their disengagement from core economic processes in the U.S. This trend predates the 2008 global financial crisis. 

Curiously, it also occurred at a time when stock option-based remuneration for senior managements was supposed to have aligned their interests with those of shareholders. The result has been a rather strange situation: Corporate profits have increased substantially, and, despite a tepid recovery of the past five years, have set new records in nominal terms and in share of the nation’s GDP. Dividend payments also grew, while taxes on capital gains and dividend income declined. Yet, the average American investor has moved to the sidelines.

These trends undermine the view, held by some market analysts, that the steady decline in trading volumes on Wall Street is a function of various technical factors, such as the emergence of other platforms, where trading now takes place. The reason why volumes are declining is probably an old-fashioned one: With retail investors being beaten down, there are fewer market players. 

Much evidence supports that idea: continuing redemptions at actively traded stock mutual funds, as reported by the Investment Company Institute; falling viewership at CNBC, which once was on every screen at public gyms and airport lounges; and the dimming fortunes of stock analysts, who only recently were big stars with considerable name recognition and public following.