In: Uncategorized9 Apr 2012
This is my Perspective column for this week’s issue of Fund Strategy.
It may not be politically correct to say it but a tiny proportion of rich people matter more to the stockmarket than the rest of us do. The threshold for what counts as rich is also probably a lot less than many Fund Strategy readers would estimate.
People typically assume their incomes are close to the average even if they are rich or poor. People tend to gauge their prosperity relative to those they know rather than to society as a whole. So it makes sense to look at the general income distribution before examining what is happening to the wealthy.
The mean take-home income in Britain in the 2009/10 financial year was only about £25,000. In contrast the median figure – that is the income of the person in the middle of the distribution – was only about £21,500. It should be noted that these figures are net of income tax and other deductions but they include income from benefits and tax credits as well as savings (figures from Poverty and Inequality in the UK 2011, published by the Institute for Fiscal Studies).
The shape of the income distribution helps explain the difference between the mean and median figures. Well over half of the population has an income less than the average national income as measured by the mean. Meanwhile, there is a “long tail” at the upper end of the distribution. High earnings are stretched between those with high incomes in relative terms, those with huge incomes and a few rising into the stratosphere.
Only 3.9m people had incomes over £1,000 a week calculated on the same basis. So those above that threshold accounted for only about 6.3% of the total population and about 12.5% of the labour force.
These figures are in line with the intuition that most of those with significant personal investments are situated towards the top of the income distribution. By definition the lower part of the distribution has relatively little disposable income. It would also be expected that those nearer the top of the distribution would have a substantially disproportionate share of all wealth.
This conclusion was confirmed by a study published by the Office for National Statistics in 2009 (Wealth in Great Britain: Main Results from the Wealth and Assets Survey 2006/08): “The wealthiest 10% of households were 2.4 times wealthier than the second wealthiest 10%, and 4.8 times wealthier than the bottom 50%. The least wealthy 10% of households had negative values for both net financial wealth and net property wealth. They did, however, have some physical wealth.
In 2006/08, the least wealthy half of households in Great Britain had 9% of total wealth (including private pension wealth), while the wealthiest half of households had 91% of the total. The wealthiest 20% of households had 62% of total wealth, including private pension wealth.”
Unfortunately, the British figures on the impact of the economic crisis on the wealthy are not that up-to-date. However, American ones are important in themselves and as a rough proxy for Britain.
According to a study by Emmanuel Saez, an economist at the University of California, Berkeley, the real incomes of the top 1% fell steeply in 2007/09 (see graph). The income of the top percentile fell by 36.3% over that period while the average for the bottom 99% fell by 11.6%. In other words the gap between the super-rich and the rest of society narrowed over that period. The average person suffered a sharp fall but the incomes of the super-rich, admittedly starting from a higher base, experienced a substantially greater drop.
However, the trend reversed in 2010, the latest year for which data is available, with the bottom 99% rising by 0.2% and incomes for the top percentile growing by 11.6%. In that year families in the top percentile were defined as those with an income above $352,000.
Saez argues that stockmarket performance probably explains much of this shift. The incomes of the super-rich are closely tied to the stockmarket so falling equity prices hit them disproportionately. It also follows that the recovery of the market helps explain the bounce-bank in the incomes of the top percentile in 2010. From the same reasoning it is likely that 2011 was a good year for them.
In other words the super-rich may play a disproportionate role in the stockmarket but in turn their income depends on stockmarket performance as a result of their exposure to equities and to share options.
This conclusion seems to be confirmed by a study of American millionaires by the Spectrem group, a consulting firm based in Chicago. Its 2012 Affluent Market Insights report looked at millionaire households defined as those with a net worth of over $1m excluding their primary residence.
Spectrem’s findings mirrored those of the Saez income study. The number of millionaire households in America peaked at 9.2m in 2007. It then fell sharply in 2008 to end the year at 6.7m households. However, in 2011 the number of millionaire households finished the year at 8.6m. Spectrem, like Saez, attributes much of the shift to the performance of the stockmarket.
The relationship between the super-rich, defined here as those in the top percentile of the income distribution, and the stockmarket appears to be reciprocal. Those in this category have equity holdings way in excess of their relative weight in the population. They are also much more exposed to stockmarket movements, both up and down, than the rest of us.
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