Markets In Action

Capital markets, the middle class, and a growing economy

This month, leaders of the financial industry gathered in Washington, DC, for the SIFMA Annual Meeting, an event held each fall to discuss the challenges and opportunities facing capital markets. Participants covered a lot of ground in just a few short hours, discussing global economic trends, the power of technology in finance, and the ever-changing political landscape.

But one theme that dominated discussions throughout the day holds particular relevance for investors and voters alike: how to develop financial policy, regulation, and products tailored to boost the middle class.

This focus on the middle class was well-deserved. “Consumers are the backbone of the U.S. economy, usually making up two-thirds of GDP,” said Beth Ann Bovino, U.S. Chief Economist at Standard & Poor’s. “The middle class lost the most [in the financial crisis] – almost 40% of their wealth in 3 years. So we’ve seen them pull back to mend their financial homes.”

To address this struggle, participants heard a slew of policy recommendations, many focused on investing in education and skills for a rapidly changing economy. “We have jobs that go unfilled in the economy because people don’t have the right skills,” said U.S. Secretary of the Treasury Jacob Lew. “We know how to solve that.”

The two state executives in attendance, Governors Terry McAuliffe of Virginia and Asa Hutchinson of Arkansas, emphasized how their administrations are working to address that problem. In Virginia, McAuliffe’s approach centers around new technologies and next-generation industries, including cybersecurity, data analytics, and genomics. Hutchinson put a similar emphasis on using education to bridge the skills gap. “We’re the first state to mandate computer coding … skills in every high school in Arkansas,” he said.

Both governors highlighted the importance of capital markets in making these visions a reality. “We are going to do another bond issue, somewhere around $3 billion, much of it for our institutions of higher learning,” said McAuliffe. He also touted the state’s strong AAA bond rating as an incentive to attract investors. “Muni bonds are an important part of state investments, no doubt about it,” agreed Hutchinson.

On the business side, leaders of several institutions cited investor education as an important way to boost the financial prospects of middle-income families.

“I have found in my career that getting investors to understand the risks that they are taking on does, over time, pay off. It will change their behavior,” said Peter Kraus, Chairman of AB. “I do think that’s something the industry should take on.”

In addition to the specific steps that can help middle-class investors improve their financial outcomes, participants also called out the importance of remembering the central role of capital markets in driving economic growth more broadly.

“Real global GDP took 300 years to double between 1492 and the time the British burned the capitol in Washington,” said Morgan Stanley Chief Operating Officer Jim Rosenthal. “Before that, it took 1,000 years to double. Within the last 15 years, it’s more than doubled again. And it’s doubled because of technology, and because of the role of capital markets.”

“It’s not just about the new idea and innovation. It’s about the municipalities,” he added. “Capital markets are about driving productivity and bringing everyone along the road to prosperity and growth.”