Focusing On Boosting The Stock Market May Actually Hurt Workers

Everything we seem to know is on shaky grounds right now. That is true for the stock market as well. The S&P 500 has fallen more than 30% since its last peak in mid-February. President Trump has often worried more about the fate of the market than about what happens to people’s health and jobs. Yet, focusing on the stock market in the middle of the crisis is not only misguided, it could actually hamper the recovery for workers after the recession.

The market mainly reflects financial investor sentiments about future profits. Financial investors know a severe recession is coming and corporate profits will take a hit. The market fluctuates heavily from day to day because investors don’t know how severe the recession will be and whether interest rate cuts, liquidity aid, and government spending will be enough to boost profits again soon. Wall Street cares about one thing and one thing only – short-term corporate profitability – and everything is seen through that lens.

What happens on Wall Street is mostly irrelevant for most American families. Only about half of all families own any stocks. The share of stocks owned by the bottom half of all Americans was less than one percent at the end of September 2019. In comparison, the top 10% of the household wealth distribution held 88.1% of all stocks and mutual fund shares at that time. The market downturn has little immediate effect on household finances for the typical American family.

Those at the top have taken a walloping to their financial fortunes over the past few weeks. When the market sharply dropped at the end of 2018, the top 10% of the wealth distribution lost a combined $3.7 trillion in the value of their stocks and mutual fund shares from September to December 2018. The current downturn will dwarf this drop.

But fret not. The wealthiest did just fine afterwards. From December 2018 to September 2019, the top 10% had recovered almost all of the original losses from the market downturn. The wealthiest typically have the luxury of waiting out a market downturn because they also have a lot of other savings. Furthermore, they  tend to have stable, secure jobs with good incomes and benefits, making them the least likely to see sharp changes in their finances amidst this current and future economic turbulence.

The market downturn, though, matters for a small subset of middle-class families. Some older Americans nearing retirement will likely experience a double hit to their finances right now. They could lose their jobs and substantial shares of their retirement savings. As has happened in the past two recessions, older Americans will find it more difficult than others to find a new job when unemployment goes up. They will then take permanently reduced early retirement benefits from Social Security because they have few savings and whatever investments they had were just decimated by the market downturn.

But most retirees received little retirement income from a 401(k) or Individual Retirement Account even as the economy was doing reasonably well. According to a recent report from the National Institute on Retirement Security, only 27% of people 60 years old and older who worked fewer than 30 hours per week had any income from a retirement savings account in 2013. And their median annual incomes from such accounts were between $5,000 and $8,000 or roughly between $400 and $700 per month. In comparison, 77.1% of that same group received Social Security benefits with median annual incomes between $14,280 and $19,680 – or approximately between $1,200 and $1,700 per month. Even when the stock market was good, Social Security played a much more important role for retirement security than income from retirement savings accounts. Policymakers should worry about older Americans’ retirement security in the crisis. That doesn’t mean they need to make efforts to boost the stock market, though.

Focusing on the stock market as a matter of economic policy is likely not only ineffective, but it could be directly harmful to American families’ finances. By making stock prices a policy goal, the administration and some in Congress are signaling to corporations that they should prioritize short-term profit gains over other things such as productive investments, hiring and workforce development. But boosting short-term profits at the expense of other goals is the opposite of what the economy will need in the coming months and years.

Yet, this is exactly what happened in the last two recessions and created much of the mess that ensued. Corporations quickly emphasized profits in the middle of the Great Recession, for instance. Their profits bottomed out at the end of 2008, six months before the recession officially ended and 20 months before jobs started to come back. And corporations kept their focus on profit gains for the next decade, limiting hiring, wages and investments. Moreover, corporations used most of their profits to pay dividends and buy back shares to boost their stock prices. Meanwhile, workers suffered from high unemployment, record high long-term unemployment, a lack of wage growth and continued financial insecurity for a decade. The stock market run up was bought and paid for by a squeezed American middle class.

As the country now stares down the path of another severe recession, policymakers need to keep their eye on helping average Americans. This means averting our focus from Wall Street’s gyrations and boosting public benefits for struggling families. It also means enacting policies that will ensure that workers’ equitably share in the economic recovery afterwards. And any steps to rescue corporations now should also protect the wages and benefits of workers. Policymakers should also target relief to lower-income and middle-income retirees to offset job and retirement savings losses. The last decade has shown what happens if policymakers don’t heed these lessons.