Capital Markets Update #1

Applying some simple math to the dataset which distributes American society into income-earning quintiles provides surprisingly insightful takeaways.  The income distribution across American quintiles is actually barbelled in terms of performance – not absolute levels of income.  For instance, according to 2024 US Census data, households earning incomes within the society’s second lowest income quintile earn approximately 170% more than household incomes within the lowest income quintile.  Similarly, households within the highest income earning band (top 20% of society’s household income) earn approximately 130% more household income than the 60% - 80% band.  In the middle, you have incomes separated by a relatively tight average of 65% more earnings than their nearest comparable quintile.  Which is evocative of a reality which exists in society writ large: you have outperformers on both ends of the spectrum with a relatively efficient “mean”.  Some individuals find themselves incapable of earning a middle-income wage (age, educational attainment, work ethic, self-perceived ineptitude, criminal history, mental capacity, etc.) while others find themselves exceptionally capable at earning an outperforming wage.  In the middle rests the market’s efficient price for labor given today’s societal and economic constraints.  Interestingly, over the last 10 and 15-years, the bottom 60% of income earners have benefitted from a 3.5% - 3.7% average household income CAGR, depending on your base year, while the top 40% have benefitted from a 3.8% - 4.0% average income CAGR over the same period. Again, this uses 2024 Census data.  On a real basis, that means lower and middle-income wage earners have seen somewhere between a 1.0% - 1.3% real wage growth CAGR over the last 10 – 15 years.  That’s better than every developed nation we reviewed.  For instance, average hourly earnings increased by about 3.8% YoY in November against a 3.0% rise in CPI (both according to FRED). Actually, trended real earnings are near their strongest levels today as compared to other historically strong real earnings periods (setting aside a few idiosyncratic points in time going back to 2000) – according to the FRED “Employed full time: Median usual weekly real earnings: Wage and salary workers: 16 years and over” strat.  According to the BLS, the average household spends $77.3K/year in expenses against roughly $87.8k in incomes.  Expenses fluctuate based on income attainment, but most are logically both lower and upper bounded.   However, it’s important to be factual here.  If the mean household can save $10k/year today and real wages have experienced strong historical growth, by definition household wealth is actually increasing rather than decreasing.  Furthermore, we can deduce using Bank of America consumer checking account data, that the average checking account for middle-income wage earners is about 20% - 30% higher today than December 2019 levels, after adjusting for inflation.  The percent of consumers experiencing personal collections is about 60% lower than 2017 levels (NY Fed), personal bankruptcies are at a near all-time low (NY Fed), share of credit cards carrying a balance is below pre-covid levels (Bank of America), the credit card delinquency rate is less than 3% (FRED), etc.  Thus, could the view that top quintiles of society are perversely benefit from wealth accretion be less a question of access or opportunity (for instance, FinTech has democratized access to markets) but more a function of diligence and choice?  Higher income earners invest more of their savings in markets than the rest of their American compatriots.   Given that stocks have gained an average of 9.8% per year since December 1999 or a 6.3% CAGR over the same period that incomes have accumulated a 3.5% - 3.8% CAGR and checking / savings accounts are virtually flat – anyone with equity exposure has seen exceptional household wealth creation and, accordingly, spending power in today’s dollars.