Wednesday, February 19, 2014

Economy: How To Participate In The Rising Productivity

(Drivebycuriosity) - There are lot of complaints about rising inequality. Former Treasury Secretary Lawrence Summers joined the camp on President`s Day. He criticized the "sharp increases in the share of income going to the top 1% of earnings, a rising share of income going to profits, stagnant real wages and a rising gap between productivity growth and growth in median-family incomes." (marketwatch).

This is indeed deplorable. But it seems to me that this problem is partly caused by those who are allegedly deprived - people with median-family incomes. The rally on the stock market which started in spring 2009 is unloved. The majority of the Americans, including the middle class (median-family incomes), shuns the stock market. The average American prefers to hold her savings in banking accounts and bonds and avoids stocks. Hence many people with median-family incomes missed the rally so far.

Ignoring the stock market is a mistake and leads to developments described by Summers. Stocks are the perfect way to participate in the rising productivity of the economy. Since its start in the year 1896 the Dow Jones, the oldest gauge for the US stock market, climbed on average around 7% annually. Though investors have been participating in rising company profits caused by the growing productivity of the companies. The engine of this development is the technological progress that is boosting the efficiency.

Since spring 2009, the end of the recession, company profits climbed around 160%, around the same rate the stock market rose. The rise of company earnings and the accompanying rally on the stock market reflect a new industrial revolution. Since the early 18th century automatization has been enabling companies to produce more goods & services with the same amount of employees. More and better machines are doing the work of people which translates into lower costs and higher profit margins. Since the early 18th century the technological process has been rising our wealth significantly while simultaneously reducing our working hours.

It seems that this process is accelerating again. Car producers and many other manufacturers are increasingly using robots and similar machines to reduce their costs. Companies are beginning to use 3D-printers to become more cost efficient and flexible.

This developments are boosted by the rapid advance of information technology, meaning combinations of computers, smartphones, Internet and other digital systems. Software - which is increasingly Internet connected and uses more and more the cloud (access to huge external data centers) - organizes the whole business: Creating new products, inducing machines to run more efficient, finding cheap suppliers, manage customer relations and so on.

I believe that these developments will continue in the decades to came - fueling a long term uptrend on the stock market.

Investors who want to participate in the stock market can buy ETFs (Exchange Traded Funds) on the S&P 500, the current gauge for the US stock market. These funds invest only in stocks which are part of this index and they have the same structure. Investors can buy & sell these ETFS on the stock market like stocks with the same transaction costs. There are at least 2 ETFs which track the S&P 500:  The "iShares S&P 500 Index Fund" (IVV) (yahoo) and the "SPDR S&P 500" (SPY) (yahoo).

If people with median-family incomes invest a part of their incomes (savings) into these S&P ETFs they participate in the rise of company profits, the climbing productivity and the growth of the economy.

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