Pricing the S&P 500 in Hourly Pay Shows Fourfold Rise in Decade

(Bloomberg) -- For a view of just how expensive stocks are, consider a different type of valuation metric: How many hours would you have to work, at the average wage, to buy into the S&P 500 Index?

By one back-of-the envelope calculation, more than ever, and almost four times the amount it would have taken a decade ago.

Such a statistic is yet another illustration of just how disconnected the stock market and real-world economy have grown. With a global pandemic raging and millions of people without work in the U.S, the S&P 500 is up about 14% year-to-date, with the largest public companies adding $4 trillion in value.

Ned Davis of his namesake research firm divided the S&P 500 Index by average hourly earnings of about $25 to find that it takes a record 145.6 hours of labor to equal the value of the S&P 500. Another way to think of it is that it would take almost 15 hours of work at the average salary to buy one share of the SPDR S&P 500 ETF Trust (ticker SPY), more than ever.

“It shows how unequal the value of work is relative to the value of investing,” Davis wrote in a research report Wednesday titled “Valuations In Wonderland.”

Consider that in the decade after the global financial crisis, average hourly earnings for the most part grew at a rate of less than 3% a year. Meanwhile, if someone had the foresight to buy the S&P 500 at its bottom in 2009, she would have enjoyed a 400% return, or more than 17% annually.

That’s been great for anyone who owns stocks, but many Americans don’t. Federal Reserve data show that only about 53% of families held equity positions in 2019, while the top 10% of American earners, who hold more than 88% of those shares, have reaped the gains.

Another key crux in much of this year’s stock market rally has been a fact that doesn’t sit well with those who worry about wealth and income inequality: Companies that have excelled are asset-light and don’t rely much on human labor. Digitally enabled companies have done just fine, or even benefited, in the wake of Covid-19. But small businesses have shuttered, restaurants had to close their doors and many planes remain grounded.

©2020 Bloomberg L.P.