Una Osili: Too many people aren’t benefiting from market growth

The recent stock market volatility has drawn widespread interest. However, over the past two years, the U.S. stock market has grown at record rates. The S&P 500 has increased about 9.9 percent this year. An unexpected finding during this historic growth is that the investment class has not expanded.

The latest evidence from a survey by the Federal Reserve Bank shows that about 14 percent of U.S. households held stock outright in 2016. To place this number in context, the majority of Americans do not participate in financial markets directly or even indirectly (through mutual funds and retirement vehicles).

Taking a longer view, the percentage of Americans who owned stocks has declined. During the 2008 financial crisis, many everyday Americans appeared to retreat from the market, which means that fewer Americans today are in a position to benefit from the gains. Based on recent data, financial wealth holdings are the second largest component of household wealth (after housing wealth). In addition, the median financial wealth holdings are $11,000, with liabilities outstripping assets for a sizeable share of households.

Even before the Great Recession, the data show that younger Americans and ethnic minorities had lower rates of market participation. My research with Dr. Anna Paulson highlights that ethnic- and racial-minority households generally have consistently lower rates of financial-market participation, holding other factors constant. We find that immigrants also tend to have lower rates of financial participation compared to similar native-born individuals and these gaps persist for several years.

One valuable insight is that social interactions have important implications for financial-market participation. When people have fewer connections with the financial mainstream, they also tend to lack high-quality information about the benefits and costs of participating in formal financial markets. High transaction costs and non-monetary barriers may discourage potential investors.

Other recent studies focus on the role of discrimination and structural barriers in explaining racial gaps in financial-market participation. Recent racial disparities in incarceration may also widen gaps in financial wealth. Economists Ngina Chiteji and Frank Stafford find that financial asset ownership among parents greatly influences the portfolio decisions of their adult children.

We must focus on building pathways to greater financial inclusion. Technology can play a role in reaching households in residential neighborhoods where alternative financial service providers are prevalent and formal financial services are limited. New platforms such as Acorn and Stash, among others, can help reduce barriers for people who have limited experience with financial investments.

For children and young adults, early exposure to financial literacy, either in the home or at school, can have a substantial impact on their financial decisions as adults. By providing their children with knowledge of financial assets early in life, parents may lower the information costs associated with participating in financial markets. Also, educational institutions can play an essential role in expanding financial literacy.

To remedy the gaps in financial-market participation, we need more initiatives at the local level that provide exposure to affordable financial products and information so that Hoosiers of all backgrounds can put their families on better financial trajectories.

By improving access to financial services, we can enhance economic prospects for future generations. Lastly, we must understand how discrimination, patterns of residential settlement, and structural barriers perpetuate wealth inequality. Policy interventions that help bring households—particularly racial and ethnic minorities—into the financial mainstream are likely to have broader payoffs for our state and society.•

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Osili is professor of economics and associate dean for research and international programs at Indiana University Lilly Family School of Philanthropy. Send comments to ibjedit@ibj.com.