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As Stock Market Soars, Companies Capitalize On Income Inequality

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STOCK MARKET INCOME INEQUALITY
A Coach retailer in the Century City district of Los Angeles. Coach and other sellers of luxury goods have benefitted from income inequality, helping push the stock market to historic highs. (AP Photo/Reed Saxon, File) | AP

Behind the headlines of record stock market highs this week is a more complex story of the inequality that characterizes the American economy.

Companies that sell discount goods to low-income buyers struggling with lean employment prospects, such as Walmart and Family Dollar, are racking up enormous sales, sending their stock prices higher as they enjoy success from distress.

Companies that sell luxury goods to the highest income households, such as the handbag maker Coach and the jeweler Tiffany & Co., also basking in lucrative times, reflecting how the wealthiest Americans are prospering with little thought of economic troubles.

But companies whose profits lean heavily on middle-income earners, like J.C. Penney and Sears, are stagnating, much like the American middle class itself.

The stock market is generally a poor proxy for the economy. Both, however, are characterized by extreme inequality, with large amounts of spending power concentrated at the extremes.

"Companies know and they've sort of noticed that the consumers in the middle are not doing so well,” said Chris Christopher, an economist at research firm IHS. “However, they've realized that the upper income brackets are doing fine. Then there's people that are living paycheck to paycheck that are always looking for a good deal,"

As Christopher portrayed it, that has produced a "bifurcation" of the stock market, with companies harvesting profits by targeting customers at either end of the income spectrum. “Those companies that stick to the middle tier just suffer,” he said.

The Dow Jones Industrial Average on Wednesday finished at a record high of 14296.24, the second record in as many days. The index has doubled since early 2009, when the economy was gripped by financial panic.

But that recovery in share prices has been uneven. A look at the so-called retail sector, which includes some of the most recognizable store names in America, shows why.

Like many other publicly traded firms, chain store companies' share prices have risen dramatically since 2009. The Dow Jones U.S. Retail Index, a barometer for the retail sector, is up 141 percent from its 2009 low.

But not all firms have benefited. Looking at share prices for JCPenney and Sears, which have barely risen since 2009, it would be hard to know that U.S. companies are reporting record profits and that the stock market is booming. Those two retail giants, which still cater to middle class Americans, are struggling with declining sales.

Meanwhile, dollar stores and no-frills retailers looking to attract to coupon-clippers have done well, as have as the luxury brand emporiums selling to those with cash to burn.

"With high unemployment and low income growth, companies are trying to squeeze money from wherever they can," said Steven Keith Platt, director of Platt Retail Institute in Hinsdale, Ill., who performs research and consulting for clients in the retail trade.

"People with money have money even when the economy is lousy," Platt said. "People like [luxury department store] Nordstrom are doing big investments in technology to get an even bigger percentage of those dollars. And the rest are just squeezed."

Operators of discount chains like Family Dollar Stores and Dollar Tree Inc. have seen double-digit growth in sales since 2008. Share prices for those two companies have jumped nearly fourfold over the same period. Walmart, the world's largest retailer and a magnet for cost-conscious customers, sold $469 billion worth of goods worldwide last year, 17 percent more than in 2008. That's the equivalent of $1,494.55 from every man, woman and child in America.

At the same time, sales of luxury jewelry, perfumes, watches and handbags have skyrocketed, to the fortune of companies that sell those goods. Shareholders of Saks Inc. have seen gains of nearly 1,000 percent, as the company went from being unprofitable in 2008 and 2009 to earning $63 million last year. Tiffany and Co., the jewelry store chain, saw its sales rise more than 20 percent from 2008 to 2011 -- the company has not yet reported financial data for all of 2012 -- as its shares on the New York Stock Exchange have gone up fourfold. Luxury hangbag manufacturer Coach saw a 47 percent jump in sales from 2008 to 2011, as the company moved from presenting itself as an purveyor of "affordable luxury" to a more upscale brand. Those sales have accelerated since 2011.

"What I've heard from luxury retailers is that, after 2008, It wasn’t that their customers couldn’t afford to shop there. It was more of people holding back due to the perception that if other people couldn't spend, maybe they should hold back, too," said Nikki Baird, managing director of retail-focused RSR Research.

Now, those wealthy consumers are done with temporary vows of modesty. But “for other shoppers, the harsh reality is that even Walmart is too expensive for them,” Baird said. “Consumers are either extremely price-sensitive or extremely insulated.”

The trend, which economists and retail experts sometime refer to as a “barbell,” is only becoming more entrenched as the economy recovers.

“We saw the barbell intensify,” Kathryn Tesija, a merchandising executive at retailer Target told analysts during a conference call to discuss the company’s financial performance during the last quarter of 2012.

Tesija explained that Target's profit over the season was split “between those early sales in Black Friday” by consumers seeking blockbuster deals “and then coming back strong at the end of the holiday,” when last-minute shoppers paid higher prices.

Tesija blamed “economic turmoil and the elections, and fiscal cliff, and all of that” for the divergence. But consumer attitudes could not be denied.

“It was a very competitive year this year,” Tesija said.

Around the Web

Income inequality driven by the stock market - CSMonitor.com

Bush tax cuts, stock market widen income gap - CNN Money

Ezra Klein - Some thoughts -- and graphs -- on inequality and income