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Does Lower Income Inequality Mean Stocks Perform Better?

James Dennin, Kapitall: There's been a lot of talk about income inequality. Does it have any effect on the stock market? 

One of the key points in President Barack Obama's State of the Union address was income inequality. Recent gains in the stock market have been hugely beneficial to the wealthy, who saw their portfolios grow significantly in 2013. But this hasn't been so good for everyone else, as wages and incomes have stayed pretty flat. 

[Read more from Kapitall: Value and Growth Stocks: Can the Good Times Continue? Rob McIver Thinks So]

Interestingly enough, according to our partners at Hedgeye, income inequality isn't a Democratic or a Republican issue. They blame quantitative easing: something which was initiated by Ben Bernanke under President George Bush. Our question is, do differences in income inequality mean stocks perform better, or worse?

Source: Hedgeye

As the video explains, quantitative easing is basically asset purchasing. And when the government take over purchasing these assets, it keeps their prices high. 

This is good for the wealthy, who see the values of these assets go up. But for everyone else, all you get is inflation. To actually buy the assets, the government needs to print money, which sends the value of currency down. Now, rich people usually only keep a relatively small portion of their assets in cash to get higher returns. 

But as Hedgeye also explains, people lower on the economic ladder don't have a lot of assets. They usually live paycheck to paycheck. And if wages stay the same, but inflation goes up, then those paychecks can buy less and less. 

Voila: rising income inequality. 

In reality it's probably not as neat as that. There are many other factors contributing to the rising income inequality levels we've seen in the US, not the least of which is the fact that our low-skilled workers now have to compete with low-skilled workers all over the world. 

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