In 1977, the richest 0.1% of households owned about 7% of total household wealth. By 2016, their share had almost tripled to around 20%. The increase has attracted attention among policymakers and researchers. Da Ke, author of the study “Left Behind: Partisan Identity, Stock Market Participation and Wealth Inequality,” published in July 2024 ABoUT THE Journal of Banking and Financeinvestigated whether and how opposing partisans differ in their wealth accumulation.

Ke drew on a geocoded version of the 1979 National Longitudinal Cohort of the Youth Survey and analyzed stock market participation decisions made by a sample of US Democrats and Republicans during presidential cycles. The survey included 12,686 American individuals between the ages of 14 and 22. Interviews were conducted in the first six months of each survey year, and in more recent waves, interviews were conducted throughout the survey year and sometimes at the beginning of the following year. Ke's sample period began in 1994 when the NLSY79 began collecting information about retirement accounts that had been accumulated with secured assets in previous years and stopped in 2016, the last year for which financial asset information is available. A key feature of the NLSY79 is that respondents reported their party affiliations. Ke's sample included 3,774 Democrats and 1,990 Republicans. Here is a summary of its main findings:

Forty-five percent of Democrats in the sample participated in the stock exchange, compared to nearly two-thirds of Republicans. The share of risky assets followed the same pattern, with Democrats, on average, holding about a third of their liquid assets in stocks, compared to 48% for Republicans. Forty-two percent of Democrats and 61% of Republicans in the sample participated in the stock market through retirement accounts.

Single individuals made up more of the Democratic sample, and white males made up more of the Republican sample.

Democrats were more likely than Republicans to be of lower socioeconomic status. On average, Democrats earned $33,000 less in household income than Republicans and owned $167,000 less in household wealth, indicating significant income and wealth inequality between Democrats and Republicans. While less than half of Democrats attended college, 59% of Republicans did.

Controlling for education, income, wealth and other relevant demographic characteristics, Democrats were 11% less likely than Republicans to participate in the stock market. This partisan gap widened significantly, by 13%, under Democratic presidencies, precisely when stock market returns have been significantly higher. The widening of the partisan gap in stock market participation under Democratic presidencies was largely driven by Democrats rather than Republicans. This dynamic pattern accounted for more than half of the discrepancy in wealth accumulation between Democrats and Republicans across presidential cycles.

While the partisan gap in stock market participation through directly held investment accounts narrowed during Democratic presidencies, the narrowing of the gap was dominated by the widening of the partisan gap in stock market participation through retirement accounts during the same periods.

Both Democratic and Republican turnout rates seem to move in the same general direction within each presidency, but the rates of change vary.

Ke's findings led him to conclude: “The presidential cycle dynamics of the partisan gap in stock market participation have important implications for family wealth accumulation. That's because US stock market returns are significantly higher under Democratic than Republican presidencies.

NBER Papers 2017 “Political cycles and stock returns,” by Lubos Pastor and Pietro Veronesi, found that from 1927 to 2015, the average market excess return under Democratic presidents was 10.7% per year, while under Republican presidents it was -0.2% per year. “The difference, almost 11% per year, is very significant both economically and statistically. Their explanation for the change was: “When risk aversion is high, voters are more likely to choose a Democratic president; when risk aversion is low, they choose a Republican. Therefore, risk aversion is higher among Democrats, resulting in a higher equity risk premium, and thus a higher average return. In our history, the high risk premium is not caused by the Democratic presidency; instead, both the risk premium and the democratic presidency are driven by high risk aversion.”

Since the market has outperformed under Democratic presidents, the widening turnout gap during Democratic (Democrat-led) regimes has contributed to rising inequality. Ke concluded: “A posteriori calculation suggests that the presidential cycle dynamics of the partisan gap in stock market participation accounts for more than half of the discrepancy in wealth accumulation between Democrats and Republicans over presidential cycles.”

In a test of the robustness of his findings, Ke carried out similar analyzes on a sample of Labor and Conservative supporters aged between 20 and 70 in the UK over the period 1991–2009. Echoing his US findings, Ke found: “Labor supporters are significantly less likely than Tory supporters to participate in the stock market, controlling for their demographic characteristics.” These findings are also consistent with those of Markku Kaustia and Sami Torstila, authors of the 2010 study “Stock market aversion? Political preferences and participation in the stock market,who found that in Finland: “A moderate left-wing voter is 17-20% less likely to own shares than a moderate right-wing voter.”

Investor Relations

While partisanship is not the only source of wealth inequality, the findings we reviewed show that there is a substantial partisan gap in stock market participation in both the US and the UK. You estimate that this gap accounts for more than half of the discrepancy in wealth accumulation. between opposing partisans in political cycles. Therefore, a favorable thing should be not allowing participation to influence investment decisions.

Larry Swedroe is the author or co-author of 18 books on investing, including his latest, Enrich your future: the keys to a successful investment