The stock market is rather high and expensive right now. The price of stock in a typical company is a bigger multiple of the company’s annual earnings than it was in past generations, around 30 times annual earnings. The U.S. economy is only a quarter of the world’s economy, yet the U.S. stock market’s value is 60% of the value of all the world’s stock markets, due to the high price of U.S. stocks. Stocks in South Korea and China are much cheaper compared to the annual earnings of companies in those countries. You can buy stock in most Korean companies for a price that is less than 10 times their annual earnings. But in the U.S., companies’ stock often costs more than 40 times their annual earnings.
What could be helping drive the increases in U.S. stock prices, which may or may not be sustainable over the long run? “More Americans Than Ever Own Stocks” as the pandemic and “zero-commission trading ‘created a whole generation of investors’,” reports the Wall Street Journal. Nearly 60% of American households now own stocks, compared to a little over 30% in 1989. “The share of Americans who own stocks has never been so high.” The current 58% share who own stocks is
up from 53% in 2019 and marks the highest household stock-ownership rate recorded in the triennial survey. The cohort includes families holding individual shares directly and those owning stocks indirectly through funds, retirement accounts or other managed accounts. The data provide the most comprehensive snapshot yet of how the Covid-era explosion in investing has reshaped Americans’ personal finances. Stuck at home during the pandemic with extra cash, millions jumped into the stock market for the first time. The elimination of commission fees on stock trading across U.S. brokerages made investing cheaper than ever. “It created a whole generation of investors,” said Anthony Denier, chief executive of mobile brokerage Webull U.S. Most households own stocks through a retirement account, such as a 401(k), but more Americans in the past few years have invested in individual shares directly. Direct stock ownership increased to 21% of families in 2022 from 15% in 2019—the largest increase on record since the survey began in 1989.
The growth in the U.S. stock market has outstripped the growth in the overall economy since the pandemic. Some of that may reflect real shifts in value — for example, the pandemic harmed smaller businesses not reflected in the stock market, while benefiting some chain restaurants that are reflected in the stock market like McDonald’s, which profited handsomely in the pandemic as people used drivethroughs at high rates and avoided in-person dining, allowing McDonald’s to more than double its prices for many menu items since 2019 in much of the country.
But some of the increase in the value of the stock market makes no sense, and thus might lead to a stock market crash. The U.S. stock market now has 60% of the value of the stock market of the entire world, even though Europe’s economy is similar in size to America’s, and China’s economy is similar in size to America’s. Some other countries rely more on debt financing rather than stock markets to fund their companies, meaning the U.S. stock market can be a disproportionate share of the world stock market’s value. But 60% of the entire world’s stock market seems excessive.
Still, with more and more Americans investing in the stock market, stock prices could rise further. As the Journal reports:
Brokerages in recent years have made trading free and easy. Newer apps like Robinhood and Webull helped popularize zero-commission stock trading on smartphones. Charles Schwab, TD Ameritrade and E*Trade all eliminated commission fees for stocks at the end of 2019. Fidelity and Schwab introduced fractional stock trading in 2020, allowing individuals to buy and sell slivers of shares. “It’s become more accessible,” said Ashley Feinstein Gerstley, a certified financial planner and founder of The Fiscal Femme. “We’ve been debunking in the last few years the myth that you have to be rich or work on Wall Street to invest.” The share of households owning stocks increased across all income levels from 2019 to 2022. Upper-middle-income families recorded the biggest jump in stock ownership. Over those three years, stocks climbed to new highs. The S&P 500 rose 16% in 2020 and 27% in 2021. Even after a 19% drop last year, the benchmark stock index notched gains over the three-year period. The S&P 500 is up 23% in 2023….Americans’ penchant for stocks is distinct. U.S. households held about 39% of their financial assets in equities in 2022, according to Organization for Economic Cooperation and Development data, a higher allocation than most other countries in the data set.
