The Tale of Two Economies
How is it that people feel that the economy has not done well when the S&P 500 Index has an average return of 12.69% per year over the past 15 years (going back to 2009); the value of homes have continued to appreciate at an annual rate of 5%; the U.S. has some of the lowest unemployment in history; and core inflation is back down to a reasonable level of 3.31% after reaching a high of 9% in June 2022 mainly due to the shutdown of the world supply-chain during the Pandemic of 2020?
I contend that there are two economies that co-exist at the same time. In 2023, Gallup reported that 61% of American Adults have investments and 66% of Americans own their homes. If this is true, then 39% of American Adults do not have investments in the stock market and 34% of Americans do not own a home. Based on today’s U.S. population, that is about 85 million to 100 million people who do not have investments or own a home. Economy “A” represents the individuals with investments and/or homeownership and Economy “B” represents the individuals who do not have investments and/or do not own a home.
Every report that we see and that we hear about, is referring to Economy A. Owning investments has not only created a tremendous amount of wealth over the past 15 years (mainly stocks), but it has also provided a hedge against the impact of the rising cost of living. Also, contributing to the growth in wealth is the appreciation of home values. Homeownership is the majority of people’s largest single investment. Just like an investment in stocks, people invest in homes for the hope of growth over time. Since 2009, if you own investments in stocks and/or a home, you do not like that the cost of living shot up so fast over the past couple of years; however, you have continued to see the value of your investment statements and homes increase which provides a level of protection against the cost increases.
Economy A: Wealth Accumulation Through Investments and Homeownership
Stock Market Returns: The S&P 500 has returned an average of 12.69% annually over the last 15 years. This means people who have been investing in the stock market (likely through 401(k)s, IRAs, or individual investments) have seen substantial growth in their portfolios. For long-term investors, this trend is even more pronounced, particularly for those who stayed invested during the 2008-2009 financial crisis and subsequent recovery.
Homeownership and Asset Appreciation: Home prices have also increased an average of 5% annually since the lows of the housing crash in 2008-2009, with some areas seeing increases far beyond inflation. Homeownership is often the largest form of wealth accumulation for middle-class Americans, and in many places, the value of homes has outpaced inflation, giving homeowners a significant boost in net worth.
Low Unemployment: The unemployment rate has been historically low, and wages have been rising in many sectors, especially for workers with skills in high-demand industries. This adds to overall economic optimism for those employed in well-paying jobs.
Inflation Control: The Federal Reserve's aggressive stance on interest rates to control inflation, while painful for some, has started to bring inflation back to more manageable levels. For those invested in assets that appreciate faster than inflation, this is generally seen as a positive economic condition.
For those in Economy A, the narrative of the economy’s recovery and growth is more than just abstract statistics—it's reflected in their growing wealth and improved financial security.
Then there is Economy B. It seems like no one really wants to openly acknowledge that this economy co-exist at the same time as Economy A. In general, because the people in Economy B do not own investments in stocks and/or in a home, they have not experienced an increase wealth. More disheartening is that the money earned from hard work continues to be worth less and less due to the overall cost of almost everything going up and wages growing at a much slower pace. These are the people who feel economically disenfranchised.
Economy B: Exclusion from Wealth Building
Lack of Asset Growth: Without significant investments or homeownership, these individuals have no hedge against inflation. They can't benefit from rising stock prices or increasing home values. As a result, even if the economy is growing in terms of GDP or asset values, these people feel left behind as their economic situation remains stagnant or worsens.
Stagnant Wages and High Costs: Many workers in Economy B may see their wages rising slowly, if at all, while the cost of living continues to climb. Even if wages increase, the increase often doesn't keep up with the rising costs of housing, healthcare, education, and food. Inflation, while it has moderated somewhat, still impacts this group disproportionately.
Debt: Many in Economy B are also more likely to carry higher levels of consumer debt, including credit card debt, student loans, and car loans. This debt can feel like a burden that never lets up, especially when interest rates are high.
Renting and Lack of Equity: Renters in particular are often at the mercy of rising rental prices and do not accumulate equity in a property. The housing market has become increasingly unaffordable for those who do not already own, and the dream of homeownership remains out of reach for many younger people, particularly in high-demand cities.
There is a tale of two economies and both are existing at the same time. How you have experienced the last 15 years can be drastically different based on which economy you live in.
By Ylanda T. Wilhite
