It's been a great decade for the rich. Their financial assets have surged in value, fueled by a stock market at record highs, low interest rates and President Donald Trump's tax cuts. Yet under the surface there are signs that their great run might be winding down and that 2020 could be a year when the wealthy endure some setbacks, giving everyone else a chance to do some catching up.
The good times for the wealthy were largely a function of the long recovery from the financial crisis. In 2010, corporate profits and the stock market had yet to rebound from the Great Recession. The same goes for home prices. Yet the fortunes for the wealthy recovered faster than those for everyone else. Home prices in New York and San Francisco, which didn't fall as much during the crash as elsewhere, rose faster than in other markets as well-educated millennial workers flocked to jobs in those cities and wealthy foreigners bought luxury dwellings. Corporate profits bounced back quickly as revenues recovered faster than employment and wages, sending the stock market to new highs by 2013.
Yet trends during the past few years suggest conditions for the wealthy are starting to soften. Pay increases for low-wage and high-wage workers have been diverging since 2018, with gains for low-paid workers outpacing the increase for high earners. According to the Case-Shiller Home Price Index, prices in New York plateaued in 2019 and in San Francisco they've started to level off after rebounding from a stumble in 2018. There's such a glut of condos in Manhattan that it could take six years to sell them all. Part of the downshift in the housing market in high-cost metro areas could be a consequence of the Trump tax legislation, which capped the amount of interest that could be deducted from home mortgages. The new rules also limited the amount of state and local income taxes that can be deducted, policy changes that fall particularly hard on the wealthy in states such as New York and California.
Meanwhile, the two biggest industries that employ the wealthy in New York and San Francisco — finance and tech — are looking to relocate or expand elsewhere. Squeezed by lower fees on their services and the high cost of living in their traditional talent hubs, the shift of financial-services employment to cheaper metro areas is likely to persist for years. The same is true for tech, which also is beset by the high cost of living, limited talent pools and restrictions on housing, particularly in the San Francisco Bay Area. Both of these changes may put limits on the potential for wage growth and appreciation for homes in those markets.
On the political front, there are two divergent possibilities in 2021, depending upon who wins the presidential election; either tax policy gets no better for the wealthy, or it gets somewhat to significantly more onerous. A Trump re-election would likely be combined with Democrats holding the House of Representatives, ensuring gridlock in the first few years of the new decade. If Democrats win control of the White House and Congress, they're likely to want to pay for new programs through some combination of higher corporate taxes, higher taxes on investments and capital gains, higher taxes on the wealthy and possibly even a wealth tax on the richest Americans. There are even signs that Republicans acknowledge that fiscal policy has favored the wealthy too much, with Utah Republican Senator Mitt Romney trying to work with Democrats to expand a child tax credit that would be paid for by changing the tax treatment on capital gains.
For financial markets, it's hard to see how the 2020s could top the 2010s. Interest rates and inflation are low, so the potential for bonds to have big gains is limited. As for stocks, valuations are as high as they were in the late 1990s bull market, while tightening labor markets and the potential for higher wages limit the prospect of rapid corporate profit growth.
During the next few years, we could see wage growth at the top lag behind pay gains at the bottom, muted performance for financial assets and real estate, and tax policy that goes against the wealthy in a Democratic administration. It won't be enough to reverse decades of growth in income and wealth inequality, but the rich would surely find it unwelcome.
This article was provided by Bloomberg News.
