Inequality is emerging as a big winner from Coronavirus

June 05, 2020

As a general rule, people who run financial companies are not supposed to talk about inequality. Also as a general rule, I don't care much for the financial industry's conventions. And I certainly don't share its values.

Inequality is exploding in 2020. It's reflecting in the stock market today. There are three fundamental drivers at play.

1. The government stepped into the crisis and forced many small businesses to close while allowing larger businesses generally to stay open in some capacity. Small businesses usually have thinner margins, less capital, and less ability to raise protective funds such as debt. As they teeter with insolvency, reduced sales, or difficult operating procedures, larger firms are scooping up their market share. These larger firms are the ones represented in public securities, aka "the market."

The ramifications of this are magnified as smaller businesses often provide the fabric that holds local communities together.

2. Higher paying jobs tilt toward industries like finance, medicine, and intellectual services. These jobs have not suffered the losses that have plagued lower-paying occupations. But the lost jobs had and have real value: I can't eat my computer, and my town without arts venues has felt gray.

3. Shutting school systems down and not reopening them this spring. In what is beginning to look like a colossal error, particularly for rural and suburban America, states closed their school systems, then did not reopen them when it was clear the curve was declining in late April / early May. Not just academically, but in terms of social support, the school system underpins equality in America. Data is showing that children may not be strong vectors anyway.

#1 and #2, in the short term, tend to benefit stock investors, as you can see in the market behavior over the past two months.

But the long-term effect on the market may not be so rosy. It's fairly clear from the 20th century that building a substantial middle class that has the freedom to invest, own part of the nation's economic output, and prosper for hard work and ingenuity is a good way to structure a society. It's crystal clear that a functioning education system is the pathway for children to engage on that upward escalator.

We'll have some work to do to recover this as a society. I'm optimistic that it can be done. But it's important to be a realist and take a hard look at what just happened.

Dan Cunningham