Rich dominate -- FED

[Eugene Coyle]

Federal Reserve Report Shows
Rich Dominate 'Investor Class'

By GREG IP
Staff Reporter of THE WALL STREET JOURNAL

WASHINGTON -- Despite the widely hailed creation of a new investor class over the 1990s, the fruits of the stock-market boom and the pain of its subsequent bust were felt mainly by a small group of wealthy households, a new report by the Federal Reserve shows.

The proportion of households owning stocks either directly or indirectly, such as through a mutual fund, rose to 52% in 2001 from 49% in 1998 and 37% in 1992, according to the report. That, combined with the surge in stock prices and home values, sharply lifted household net worth -- assets minus debt -- to an average of $395,500 per family in 2001, up 29% from $307,400 in 1998. The dollar figures are all inflation-adjusted and expressed in constant, 2001 dollar terms.

But the report, by Fed economists Ana Aizcorbe, Arthur Kennickell and Kevin Moore, also shows that those averages are heavily skewed by the enormous stock holdings of the wealthiest 10% of families. The typical family's net worth, as measured by the median -- half of families are above the median, and half are below -- rose only 10% in the same period, to $86,100 from $78,000.
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Many analysts say the rise in stock ownership to more than half of households has created a new investor class whose concerns about their stock portfolios heavily influence their economic and political choices. President Bush's proposal to eliminate taxes on dividends in part is aimed at this group. But Wednesday's report, based on an exhaustive, triennial survey of consumers and their finances, suggests that in dollar terms, the increase in stock wealth has been narrowly based.

Among all stock-owning families, the median holding was $34,000 in 2001, up 26% from $27,000 in 1998 and more than double its 1992 figure of $13,000. But the typical homeowner had four times as much wealth tied up in his house: $122,000 in 2001, up 12% from $109,000 in 1998, the report concludes.

Of those families who own stock, the median holding of the richest 10% by income shot up 69% to $248,000 in 2001 from $147,000 in 1998, the Fed report found. For the middle 20% of households, however, the median holding rose just 15% to $15,000. For the bottom 20%, it rose 29%, to $7,000 but that's below the 1992 level of $10,000.

Just as the wealthiest disproportionately enjoyed the boom, the pain has also been concentrated among them. Fed economists, lacking survey data for 2002, estimated the average household's net worth stood at $341,300 on Oct. 4 last year, roughly when the stock market hit a five-year low, a 14% decline from 2001. But the median household's net worth, they estimate, declined just 6% in the same period, to $80,700.

"Stock ownership is still highly skewed towards upper-income households," said Dean Maki, an economist at Putnam Investments and former Fed researcher. "So the boom and the bust are also going to be highly skewed, and those affect the average more than the median. The median household isn't terribly exposed to the stock market."

This, in turn, helps explain why the enormous loss of stock-market wealth since the peak in 2000 hasn't crushed consumer spending. Most of the stock loss has been born by the rich minority. Other Fed data suggest that they have in fact cut back on their spending as a result, whereas the vast majority of families haven't altered their spending and saving behavior significantly.

The report also finds that minority households saw little increase in their net worth during the boom era. The median nonwhite or Hispanic household's net worth was $17,100 in 2001, down from $17,900 in 1998, though up 16% from $14,800 in 1992. By contrast, the median white household's net worth rose 17% to $120,900 in 2001 from $103,400 in 1998, up 40% from $86,200 in 1992.

The report also suggests that households aren't as indebted as commonly thought. The median family paid 16% of its after-tax income to service its debts in 2001, down from 18.1% in 1998 and up only slightly from 1995. Every income group, from the poorest to the richest, experienced a decline.