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S&P 500 Ramps Over 200% In Last Six Years

Written By Brian Hicks

Posted April 7, 2015

Widening Gaps

You might want to consider quitting your day job and investing in the stock market full-time. The rate that the S&P 500 has been making gains as opposed to recent wage behavior favors that dicey enterprise more than ever.

Make no mistake, wages are improving, but the rate has been easily outpaced by what the S&P has done in the past six years.

With wages up only 2%, and equity rising 20% annually, the staggering gap hasn’t been wider in a bull market since 1966.

While the comparison between salaries and stock growth isn’t perfect, the figures are telling.

As the S&P is mostly made up of companies based in the U.S., you can see how much American companies have benefited from stifling wages, resulting in over $12 trillion in additional capital.

What’s worse is that significantly less stock is owned by families than there was almost eight years ago. In 2007, 53.2% of households held stock. By 2013, that number fell to 48.2%.

That means that while the S&P flourished, more and more shares have been bought by institutional investors rather than those who have suffered the most due to the lack of salary growth.

In fact, a large part of why earnings have been so strong is because wages have made so little upward progress. And those earnings are going back to those companies as well as shareholders in larger amounts.

To be sure, U.S. households have grown in value due to record stock prices, with their collective net worth climbing to a record $82.9 trillion in the fourth quarter.

But the benefit isn’t shared throughout all classes. Among the worst-paid Americans, less than 30% of families invest in stocks, compared to 92% for the richest.

In other words, the gap between Wall Street and standard investors, upper and lower classes, is widening, and it’s only going to get wider until a significant change is implemented.

Treating A Symptom

While hourly wages are on the rise, the gains aren’t enough to affect any substantial change nor is it a sign of a shift in the corporate mood. Hourly rates only rose 0.3% in the last month and 2.1% in the last year.

Most wage increases are understood to be issued from tied hands.

For instance, Wal-Mart Stores Inc. (NYSE: WMT) with its stock up for the past five years, announced that it would raise rates for 500,000 of its hourly employees. Several chains owned by The TJX Companies, Inc. (NYSE: TJX), including T.J. Maxx and Marshall’s, will follow suit.

On April 1st, McDonald’s Corp. (NYSE: MCD) said that it will raise pay by at least $1 at all of its company-owned locations as opposed to franchises. Unfortunately, we doubt a small wage increase will provide the necessary force to pull the Golden Arches back from the brink of decline.

Share Manipulation

While wages make small progress, profits margins and CEO salaries are higher than ever, fueled by company earnings. And those earnings will be maintained by continuing to cut costs in commodities and labor when necessary.

In the meantime, employee productivity measured in output per hour is rising at an average of 1.5% a year, not to mention that equities are approaching record highs, due in large part to companies recently spending $2 trillion on share buybacks.

Buybacks are a great way for companies to make their numbers more appealing to investors without actually doing anything to improve the company itself or offer investors anything new.

A company buying its own stock reduces the amount of shares on the market which artificially increases the stock as share price is determined by dividing a company’s market cap over its total shares.

So earnings are up, either artificially or due to unfair allocations of resources, wages are stumbling and the S&P hasn’t looked this good in a long time.

If you can’t beat them, join them. The best way to start making money right now is to get investing. Index funds are a great place to start given the S&P 500’s anticipated, continued performance.