Opinion: Sizzling stocks, why aren’t you invested?
It’s smokin’! Ask anybody. Here in the United States, it’s the greatest economy since the days of President Ronald Reagan. How do we know the economy is so great, you might ask? Well, just look at the Dow Jones Industrials. The average of these stocks has been above or hovering around $34,000 for weeks. The highest ever. The S&P 500 is over $4,200. And NASDAQ has topped $14,000.
This economic boom comes after more than a year of social restrictions brought on by a global pandemic, a viral infection that has killed millions of people throughout the world, that brought many activities to a halt, that forced many businesses into bankruptcy or foreclosure forever. And the disease rages in India, a country with more than 1.3 billion people. Iran, Italy, Spain, and China are also suffering high levels of infection and death.
Although nearly half of our country has now received at least one dose of the vaccine, stores where we used to shop and restaurants that we once patronized are either closed or have reopened with severe restrictions and a smaller staff. It is widely accepted that our country has not suffered such devastation since the Great Depression of the 1930’s. And the latest word from CDC is that the U.S. may not reach herd immunity for several years, if ever. If that’s true, how have the prices of stocks shot through their previous ceilings?
The answer to that question is painfully simple. The vast majority of Americans either does not own stocks or has trivial holdings in the stock market. About 40 percent of stock in U.S. corporations is owned by foreign investors, and another 30 percent is owned by union and corporate retirement accounts or by public-service retirement accounts. Most of the remaining stocks are in the possession of rich Americans.
The rich get richer
As I pointed out in a previous column, the number of billionaires increased during the pandemic, and the collective wealth of this relative handful of American soared by thirteen figures. Now, we’re talking trillions, not billions.
The average holdings of the top ten percent average $1.7 million; the average of the bottom 50 percent is $11,000. Moreover, nearly all of the top ten percent (94 percent) own stock, whereas only about a third (31 percent) of the bottom 50 percent owned any stock, either directly (individual accounts) or indirectly (mutual funds).
This is not news. Statistics like these have been well known, published, broadcast, and discussed for the past two or three decades. And the data, per se, don’t explain an exploding stock market in the midst of a pandemic. So, some other factor must come into play.
The buy-back strategy
Let’s say that Corporation X has issued 100 million shares of stock over the years. The corporation holds 30 percent of its own stock, and the Board of Directors and chief executives own another 20 percent. That leaves 50 percent on the market, to be purchased by mutual funds, pension plans, retirement accounts, and individual investors.
During hard times, like the past year, individual investors — particularly those who could only afford to have purchased small amounts of stock — have to sell off their shares in order to pay mortgages, medical expenses, or monthly bills.
John Q. Public is the owner-operator of an independent stationery store who bought 100 shares of stock in Corporation X some time ago when the price was $20 per share. Today, the stock is selling for $22 per share, down from a high of $26 a year ago. Because of the pandemic and online purchasing, the stationery business has been bad, and Mr. Public decides to sell his stock at market price. After the sale, he gets $2,200, less brokerage fees. Depending on circumstances, he may have to pay capital-gains tax, and his profit is added to his annual income, which may increase his federal and state income tax.
Mr. Public’s formerly-owned shares are now on the open market, and Corporation X buys them back at $24 per share. The corporation also buys back shares of other small investors. On Tuesday, it is offering $25 per share. On Wednesday, other investors notice that the value of shares in Corporation X is increasing, and they start buying at $26 or $27. By the following week, shares in Corporation X are selling for $30 a share.
Let’s do some math. Corp. X owned 30 million shares of its own stock, worth $600,000,000. The following week, through buying back its stock, it owned 35 million shares, and each share was selling for $30. So, the company’s original 30 million shares are now worth the current market value, or $900,000,000. Its recently-purchased 5 million shares are valued at $150,000,000. So, the company that held $600 million in stock a week ago, bought back some of its stock each day as the price was rising, spending about $100 million. But now the corporation has $1 trillion in stock, and the ability to keep the ball rolling.
If that sounds ridiculous to you, consider this. One share of Google, which sold for less than $50 a decade ago now commands a price of $3,000. One share of Seaboard Corp. (transportation and agriculture) costs $3,150; Amazon is currently selling at $3,340; NVR (homebuilding and mortgage), $4,500; and Berkshire Hathaway (Warren Buffett’s holding company), $348,000. (All prices are real, but rounded off.)
John Q. Public’s original $2,000 wouldn’t be enough for even one share of these companies. The real problem, as I see it, is that it’s not just these giants whose stock is not accessible to average investors, it’s the local business that they’d like to invest in, like AutoZone ($1,250 per share) or Chipotle Mexican Grill ($1,400 per share).
The economy doesn’t sizzle for all. Only the wealthy few.
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Jim Glynn is Professor Emeritus of Sociology. He may be contacted at firstname.lastname@example.org.