At Charles Schwab & Co. Inc’s. Michigan Avenue brokerage office on Tuesday, Keith Klamer, a 40-year-old advertising copy writer, took the plunge. Just one day after receiving an inheritance from his mother, who died in August, he opened a brokerage account.
“It’s scary,” he said. “I hope when I put my money in, the bottom doesn’t drop.”
He’s not alone. The historic bull market of the late 1990s has broadened stock ownership to nearly half the population and dramatically increased the wealth of the average American household, according to a survey released by the Federal Reserve Board on Tuesday.
While the nation’s richest families garnered most of the new wealth generated over the last decade, by 1998 most households were financially better off than they were in 1989.
The one group swamped by the rising tide was the poorest of the poor. Although the booming economy has reduced the number of families earning very low incomes by a sixth, the 12.6 percent of families who were still earning under $10,000 a year watched their incomes stagnate and their net worth fall between 1989 and 1998.
Families earning between $10,000 and $24,999 a year also lost ground. But analysts point out it probably was the large number of families escaping extreme poverty that dragged down the averages for the next rungs on the wealth and income ladder.
“In spite of the welfare changes . . . 1 in 6 of the bottom group managed to move up into the next highest group,” said Robert Lerman, an economist at the Urban Institute. “What we have here is a positive picture from a growing economy. A 4 percent unemployment rate moves more and more people into the mainstream.”
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For the broader society, the Fed’s most recent Survey of Consumer Finances–conducted every three years by the University of Chicago’s National Opinion Research Center–statistically confirmed what most people have been feeling for some time.
The feverish run up in the Dow Jones industrial and Nasdaq averages has been lifting most boats, and quite smartly too. Fully 48.8 percent of families owned stocks either directly or through retirement accounts and mutual funds in 1998, up sharply from the 40.4 percent who owned stocks in 1995.
Rising stock investments helped push family assets to record heights in the most recent survey. A family’s net worth measures the value of its home equity, bank accounts, stocks, retirement accounts and personal property.
The median family, which means half owned more and half less, watched its net worth rise 17.6 percent to $71,600 between 1995 and 1998. That put the average American family a stunning $11,900 ahead of where it was in 1989.
“A continued rise in the holding of stock equity combined with a booming stock market accounts for a substantial part of the rise in net worth,” the authors of the report said.
The survey showed the number of workers investing in retirement accounts, mutual funds and individual stocks jumped sharply between 1995 and 1998. Nearly 1 in 2 now have retirement accounts with a median value of $24,000; one in five families own individual stocks with the median portfolio valued at $17,500; and 1 in 6 own mutual funds whose median value was $25,000. All were substantially higher than three years earlier.
William Garcia, a 33-year-old employee of Shaw’s Crab House on East Hubbard Street, discovered mutual-fund investing two years ago through the 401(k) plan at his workplace. “I think nobody knows what’s going to happen in the future, so it’s better to have a little bit than nothing at all,” said Garcia who lives downtown.
But he’s still staying clear of individual stocks and keeps his spare cash in a savings account.
The remarkable gains in household wealth have come despite the slow growth in wages and salaries for most workers. Indeed, the survey showed that the number of families saving out of their incomes–55.9 percent–remains virtually unchanged from three years earlier and was still below its 1992 levels.
But the ability of low-income workers to move up the wage ladder is improving their financial prospects in other ways. The survey showed that the number of families without a checking account fell to 13.2 percent in 1998 from 18.7 percent a decade ago.
Owen Canepa, 26, reopened a checking account a year ago to pay his gym membership fee. But he still pays for his rent in Rogers Park in cash. “I try to keep things simple,” said Canepa, who said he is in the $20,000 to $30,000 income bracket. “I would like to do some investing, but I have to make some more money first,” he said.
Further up the income scale, it’s not hard to understand why most families have been letting the stock market do their saving for them. The jump in net worth was accompanied by only a small increase in family income and a rising level of household debt, a disturbing trend that could cause problems down the road if the stock market takes a sharp tumble.
The median family income in 1998 rose just $700 to $33,400 from its 1995 level and was just $600 ahead of where it was in 1989. The average debt level, meanwhile, rose 42.3 percent to $33,300 in 1998 and stood 73.3 percent higher than it was at the start of the decade.
The growing mountain of debt has been especially pronounced among low- and moderate-income families. One in every three families with incomes below $10,000 paid more than 40 percent of their income in debt service in 1998, according to the survey, while 1 in 5 families earning between $10,000 and $24,999 paid a similar percentage. Both are record highs.
“A lot of low-income families are laboring under tremendous debt burdens, and that puts a lot of financial pressure on them,” said Edward Wolff, an economist at New York University who closely monitors the Fed survey data.
Debt levels are still a long way from setting off alarm bells for economists, who focused most of their attention Tuesday on the sharply increasing levels of household wealth for most groups and the economy’s ability to push more people into the upper income brackets.
For instance, the percentage of families earning under $50,000 a year fell sharply over the three-year period, from 71.5 percent of all households in 1995 to 66.6 percent in 1998. As people moved up the income ladder, the ranks of families earning between $50,000 and $99,999 rose to 25.2 percent of all families, from 21 percent in 1995. Those earning above $100,000 rose to 8.6 percent of families from 7.4 percent three years earlier.
Mike McJunkins, a 40-year-old Atlanta real estate developer, is among the fortunate earning more than $100,000 a year. Sitting in the lounge of the John Hancock Tower, McJunkins said his increasing salary has allowed him to pour more money into the stock market in recent years, and those assets have soared.
“We certainly can’t complain,” he said. But he remains cautious. ” A lot of people have jumped into the market thinking it’s an easy way to make money. That’s subject to change. We’re not as smart as we think we are.”
Economist Robert Frank of Cornell University and author of “Luxury Fever” pointed out that moving into the higher income brackets often doesn’t lead to higher wealth. “In many ways you are worse off,” he said. “If you’re the average family and you want to send your child to the average school, you have to carry a mortgage on a 2,200 square-foot house today, compared to 1970 when (the size of an average home) was 1,500 square feet.
“So even though your income has gone up, you have to take on a lot more mortgage debt,” he said.