The Split Between Wall Street and Main Street and Why it Matters Now

As the United States moves towards a highly contentious election next month, its economy continues to see an increasing split between two groups. On one hand, finance, tech, and the S&P 500 Index continue to prosper. On the other hand, small and medium-sized businesses, hourly workers, and service businesses such as restaurants, movie theaters, and tourism are deeply struggling. This disconnect between Main Street and Wall Street not only has implications for the election itself but also for any eventual economic recovery.

In both this article and in the coming weeks, I will be using this space to focus on the broader implications of this disconnect, how it affects Americans through the economic disruption of the pandemic, and how the roots for these issues were planted decades ago. This week, we begin by focusing on how the stock market and corporate profits flirt with record highs but have become increasingly disconnected not only from workers but also from larger parts of the economy that are suffering.

How we came to this point

Although the COVID-19 pandemic has demonstrated clear and growing disparities in incomes, employment, housing, and health care, there has been ample evidence for some time that corporate profits are disconnected from broader measures of economic opportunity. As many economic pundits have cheered the rise of stocks such as Apple and Tesla, opportunities for workers to raise their economic progress and save for their retirement face major setbacks. This is particularly true for women in the workforce, but the impact of the disconnect is nearly universal.

Employment in manufacturing peaked decades ago back in the late 1970s, offering fewer jobs for workers without a college education. In the process, many of these workers were denied a path into the middle class. And while tech companies have been driving high levels of growth in the service economy, they have a much smaller footprint. Despite low unemployment over the last decade, real wage growth for most US workers has been stagnant, providing fewer and narrower pathways into the middle class and beyond. Indeed, wages in 2018 were roughly the same as they had been in the mid-1970s when many Americans began to feel that their prospects were worse off for the first time in decades.

When voters don’t see a place for themselves in the modern economy and feel left out of the country’s future, it undermines their trust in institutions, from the news media to the government. This disconnect leaves many voters at risk of disengagement from the democratic process itself.

The markets and the economy

After the pandemic began in the United States in March, investors’ reaction caused a major selloff, leading the S&P 500 index to drop 12.5 percent in value and generating concerns about a prolonged bear market. However, the S&P 500 rebounded with 12.7 percent growth in April, even while the economy lost 20.5 million jobs, and has continued to rebound since, posting monthly returns of 4.5 percent in May, 5.5 percent in July, and 7 percent in August. Potential explanations for the stock market’s strong rebound include the large fiscal stimulus, the influence of profitable tech firms, and strong expectations of an eventual recovery.

For years, political leaders have played up the state of the economy by pointing to the stock market. This has been consistently true over the past few years as the market has risen to new heights. But there’s little evidence that rising stock prices have benefited most Americans and several reasons for this disconnect.

The concentration of stock ownership

First, ownership of these assets is fairly concentrated and this is only increasing over time.

Stock ownership climbed substantially with the advent of IRA and 401(k) plans in the 1980s, rising from less than 5 percent of the population in the 1950s to about 20 percent by 1990 and more than 60 percent before the 2008-09 financial crisis. After falling slightly, it has since remained at around 55 percent.

However, research has also shown that the wealthiest individuals in the country hold a disproportionate share of stocks: 94 percent of the top one percent of wealth holders owned stock in 2016, over four times the rate among the bottom 20 percent of wealth holders (20 percent). At the same time, the richest 10 percent of households owned 84 percent of the total share of all stocks

To be certain, many of the country’s wealthiest individuals and households have sufficiently diverse assets that they can afford the risks of stock ownership. But this also means that fast-rising stock prices (as we’ve experienced over the past several months) only enable wealth gains to accrue to a relatively small share of the population.

Shift away from worker ownership

Second, employees at many profitable companies are unable to benefit from their stock prices.

That wasn’t always the case. During the 1980s, tax policy initially favored a stronger link between stock market performance and worker compensation. Beginning in 1984, federal tax laws began to offer large incentives for employers to provide Employee Stock Ownership Plans (ESOPs) to their employees, including deferrals on capital gains taxes for company owners selling to ESOPs. By 2018, there were over 10 million active participants, holding more than $1.4 trillion in assets.

However, the nature of ESOPs shifted rather dramatically over the past 20 years. Congress took action in 1998 to limit workers' exposure to volatile prices of their employers’ stock, but restrictions were only placed on employee contributions, not employer matches, and they included an exemption for ESOPs. The shift was much more pronounced after Enron’s 2001 bankruptcy filing, which caused thousands of the company’s employees to lose their retirement savings that had been invested in company stocks. In the wake of Enron’s collapse, some critics called for a total ban on ESOPs due to their risks.

Prominent companies have also shifted away from providing regular employees with stock options. Microsoft made this decision back in 2003, claiming that it aligned the interests of employees and shareholders. Amazon announced in 2018 that it would phase out stock options vesting in 2020 and 2021 for hourly fulfillment and customer service employees, claiming that this group preferred the predictability and immediacy of cash and raising its minimum wage to $15 per hour.

Unequal distribution of profits

Third, the profits of strong economic performance are not widely distributed in the market. This is true of the relationship between companies as well as within them.

In April, Goldman Sachs showed that 27 percent of the S&P 500 total index value consisted of the top 10 stocks. The top five companies alone accounted for 20 percent of the index, and all represented the tech sector: Microsoft, Apple, Amazon, Alphabet, and Facebook. The dominance of US tech giants now has a larger influence on the stock market than at any point since the late 1990s tech bubble.

At many tech startups, there has also been a shift in the balance of power between founders and their employees. Many startups are now taking longer before going public, potentially enabling investors to benefit at the expense of the firm’s employees. When founders receive restricted stock awards and investors receive preferred stock, employees are frequently limited to common stock options, taking on higher risk during a company’s early stages with relatively less potential for long-term gains.

Where does this leave us?

To be sure, there are strong reasons to care about the performance of the stock market—particularly when millions of Americans depend on it for retirement savings. But when the benefits of a bull market are not available to all Americans, what does that mean for our political future?

As we look ahead to the elections, we often focus on what a victory for the incumbent or the challenger means for investors. However, there are strong reasons to believe that investors in the market would find only marginal differences in their outlook depending on the winner of the presidential race. There is even evidence that, despite the corporate gains generated by the 2017 tax cut, market returns have consistently been higher under Democratic presidents than Republican ones. In this year of turmoil, it is vital to understand that our hopes for a more prosperous future for ourselves and our families are profoundly different based not only on how much we make, what we do, or where we live but on whether or not we are invested in the market.

At a time of rising inequality, we must focus on the implications of the election for workers and their families. While it’s encouraging to see stock prices bounce back so quickly during the pandemic, the more energy we spend tracking the market’s movement every hour, day, or week, the more likely we are to lose sight of the long-term shift in wealth from middle-income to upper-income households. And as we look beyond the election, a full economic recovery—not to mention the recovery of trust in our institutions and in one another—will depend on making the benefits enjoyed by Wall Street investors accessible to far more people and businesses on Main Street.