Hiltzik: The stock market narrative shouldn’t rule your life

After the Dow, are you?

The much-watched stock market indicator has been everywhere this month: two triple-digit gains and no less than 10 triple-digit declines in the 17 trading days so far this year (including Wednesday, when the market returned after the Federal Reserve Board predicted an interest rate hike as early as March).

On Monday, the blue-chip index fell more than 1,100 points, or about 3.25% from the previous close, to end the day up nearly 100 points.

“The federal government is the most important financial partner for most Americans.”

Economist Teresa Ghilarducci

The broader stock market was also in a swoon. The Standard & Poor’s 500 index fell 7.5% this month, after gaining almost 27% in 2021.

If you’re careful enough to alternately grab the arms of your chair until your knuckles turn white and you take deep breaths of relief, you’re doing it wrong.

The ups and downs of the stock market, especially the widely quoted Dow Jones, communicate an easily accessible narrative through which to grasp economic trends.

As Nobel Prize-winning economist Robert Shiller observed in his 2019 book Narrative Economics, these stories allow us to construct a coherent picture from a jumble of complex and confusing events and conditions.

The narrative constructed to explain the stock market boom of 2000, he wrote, brought together the advent of the World Wide Web, baby boomers retiring, falling inflation, and optimism about affairs – “seemingly unrelated stories that all went viral around the same time.” However, that story only held temporarily, as the bubble burst in 2001.

The narrative shaped around stock indexes, writes Shiller, persists in part because daily changes are endlessly reported by the news media and because “people widely believe that the stock market is a fundamental indicator of the health of the stock market. ‘economy”.

This is often misleading, however. More importantly, the stock market has nothing to do with most people’s financial situation. For the vast majority of Americans, any fixation on the short-term ebb and flow of stock prices — especially day-to-day price swings — is financially unsound.

There are several reasons why this is so. For starters, most Americans have little or no direct exposure to the stock market.

Only about 15% of all families directly own stocks, and even that figure is skewed by the large holdings of the wealthiest 10% of households (those with a net worth of $1.2 million or more); approximately 44% of these households own shares directly.

Among households with a net worth around the national median of $121,700, only about 11% own stocks and among the poorest 20%, with a net worth of $6,400 or less, only about 5% own shares. (The numbers come from the Federal Reserve’s latest triennial survey of consumer finances, which was released in 2019.)

According to the Federal Reserve’s Survey of Consumer Finances, the wealthiest 10% of U.S. households hold the largest share of retirement accounts – more than twice as many as all other households combined. Their share of the pie has risen sharply.

(Federal Reserve System)

Overall, direct holdings have fallen from their peak of 21.3%, reached in 2001. Two stock market crashes have driven American families out of the love of the stock market, even as holdings have sagged a little recovered from their low point of 13.8% in 2013.

About 53% of all households own stocks in one form or another, but they do so primarily through retirement accounts.

According to the Institute of Investment Companies. An additional 10% is invested in bond or money market mutual funds.

These are professionally run, so they tend to be relatively immune to the kind of emotional reactions that can cause investors to make the wrong decisions at the wrong time – panic selling during downturns or overly exuberant buying during downturns. bullish frenzies, for example.

Defined-benefit pensions, whereby workers are guaranteed payouts based on their earnings and job longevity, offer even more protection against stock market fluctuations, since they are the managers of the pension funds, not workers, who bear the market risk.

Even among the richest 10%, direct holdings represent a fairly small share of their assets. “Although 70% of the top 10% directly own stocks,” New School economist Teresa Ghilarducci told the Senate Banking Committee last year, “it’s only 13% of their wealth.” . The businesses they own, real estate and retirement accounts, and retirement plans make up more than half of their net worth on average.

Over the past two years, the narrative of stock trading as a path to wealth has grown in prominence. As Ghilarducci argues, this is a distinctly unhealthy development, especially for young people who may be entering their prime earning years right now.

A resurgence of interest in short-term stock trading has been spurred by commission-free brokerages such as Robinhood, which gives young investors the impression that stock trading is a fun game and the notion that Stock trading needed to be “democratized” – that is, taken out of the control of the big players on Wall Street and placed in the hands of the retail trader.

Chart shows median family retirement account savings by age between 1989 and 2016

Most families have relatively paltry income in their retirement accounts, even those approaching retirement.

(Institute of Economic Policy)

“Robinhood has pushed financial literacy backwards rather than forwards,” Ghilarducci told me. “Places like Robinhood make a lot of money promoting this ‘democratization’ ideology. They really hit people who are used to electronic games, like young men. It skews some people’s decisions, putting them at great risk.

Robinhood not only makes a stock trading game, but lures customers into riskier investments such as options and nonsense investments such as cryptocurrencies.

“We need to regulate these financial predators who peddle the idea that wealth creation will happen if people have access to these risky products and services,” Ghilarducci says.

She’s right. The truth is that for a majority of Americans, the main source of wealth is not savings accounts, private pension plans, stocks and bonds, or the equity in their homes. It’s Social Security.

For households with a member over age 52, the program’s median contribution to the retirement nest egg – that is, the present value of the payments expected for those claiming benefits at retirement age at full – is higher than any other source except among the top 10. %, according to the calculations of Ghilarducci.

For them, the median Social Security contribution of $274,966 is exceeded by home equity (median $400,000) and private pensions (median $823,000).

In 2015, according to the latest available calculations, Social Security accounted for more than half of the income of 37.3% and more than nine tenths of the income of 12.1% of men over 65. The program provided more than half of the earnings of 42% and above. more than nine-tenths of the income of about 15% of women over 65.

This underscores the imperative to protect Social Security against attempts at tampering, such as George W. Bush’s plan to privatize the system and proposals to cut benefits. “Wide-spread benefit cuts,” MIT economist James Poterba wrote last year, “would place a heavy burden on the subset of recipients who rely heavily on this program for retirement assistance.”

The fascination with stock picking may stem in part from doubts that Social Security will exist long enough to protect Americans’ pensions decades from now. Another factor is the recognition that the private pension structure of the past, whereby employers rewarded workers for their long-term loyalty, has collapsed; less than one in five American workers has access to these retirement plans.

This system has been supplanted by 401(k) defined contribution plans, which place the responsibility for funding, as well as the risks of market downturns, on the workers themselves.

However, defined-contribution schemes favor higher earners much more than older defined-benefit pension schemes. Some 44% of all households participate in an employer-sponsored defined contribution plan, but participation ranges from just 10% among the bottom 20% of families to 70% among the top quintile.

This could reflect the difficulty that low-wage families have in setting aside their contributions for their retirement, as well as the greater tax savings that wealthier workers obtain by putting part of their income into tax-based systems.

The emergence of strange get-rich-quick schemes such as cryptocurrencies and non-fungible tokens, or NFTs, distracts from the fact that “the federal government is the most important financial partner for most Americans” , says Ghilarducci.

It’s true. Social Security is an indispensable bulwark against poverty for its 65.2 million beneficiaries; Medicare covers medical costs for 61 million enrollees, most of whom are 65 or older; and Medicaid provides medical coverage for 82 million low-income Americans, including children. The stock market has no impact on any of these programs.

Americans who want to set their minds on how to build and protect their long-term wealth should spend it making sure our political leaders are focused on building them.

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