A New Kind of Operation Twist

The decoupling of Wall Street from Main Street has been a phenomenon discussed by economists for some time. More recently, Mohamed El-Erian suggested that "actual and expected support by the Federal Reserve has again decoupled markets from economic and corporate fundamentals."

This isn’t just a recent phenomenon - gains in equity markets since the great recession have far out-paced any gains in wages, standard of living and certainly any improvements in the general infrastructure of this country. Yes, the labor market has improved (until Covid-19) and more people had jobs than at any time in the past few decades – on paper all looked good for the workforce.

But the gains have not been equally shared among society. Those who find themselves in the lower half of the wealth distribution have not been able to participate in the massive gains of equity markets. Reasons for that are multifold but on balance, most workers have prioritized putting food on the table, having a roof over their head and if there was anything left, they may have paid off some credit cards. 

 One way to show the allocation of investor gains entails an analysis of the flows of funds to and from Wall Street as well as a look into investor participation, both of which require access to data I don’t have. But we can also show the decoupling of financial assets from economic fundamentals by looking at the affordability of stock prices.  Average investors found it increasingly prohibitive to invest, despite a roaring stock market. Soaring stock prices, the likes of Amazon at about $2,300 a share seem out of reach for many smaller investors. Yes, Amazon could easily do a stock split like so many companies did on a regular basis. However, that doesn’t change the comparative affordability, particularly when Amazon stock could be bought at the beginning of 2011 for about $170.

To get a sense of stock affordability, I have examined how many hours of work are required for an average employee to buy 1 share in a representative stock. The chart below shows how many hours an average worker would have to work to buy 1 share of SPY (S&P 500 Exchange Traded Fund) or Apple (AAPL)  since 2011. The increase in hours worked to buy one share in these two tickers clearly shows how it has become less and less affordable for average workers to participate in the admittedly amazing increases in stock prices over the past decade. Undoubtedly, companies like Apple and Amazon are among a small class of exceptional companies and the affordability argument may be a bit stretched. Still, the cost of buying one share of the general market, represented by SPY, has gone up about threefold in terms of working hours allocated.

As a side note, it also shows that in 2009 it would have cost an average worker only about one hour’s worth of work to purchase one share of Apple. Not a bad return on an hour’s work when you look at an Apple stock price of about $275 at the time of writing this.

Granted, the argument can be made that even the small investors could just buy a single share – who doesn’t have a couple of hundred bucks to spare. But the point of this is to show how gains in the stock market have vastly outpaced the gains in wages for average workers. It also suggests that on aggregate, large corporations have put shareholder interests ahead of the benefits of their workers and maximize the value of their firm. Here, one of the big names like Amazon comes to mind.

The living wage argument is particularly evident in current times when corporations lay off employees to protect shareholder interests, while the workers are left holding the bag. When Covid-19 hit, my immediate concern was to the health of the people of this great country. Trillions of dollars have been spent to avert a crisis that is first and foremost a health crisis.  But were the trillions spent appropriately?

Instead of socializing Wall Street while invoking the full thrust of market forces on the working population, how about a new operation twist that lets the free market take care of the fate of corporations. Caveat emptor!