Optimism on Wall Street has pushed stocks higher, but consumer sentiment continues to plummet. What explains this divergence?
The current gap between consumer confidence and the stock market is noteworthy. The green line represents the S&P 500 index, which has been experiencing a consistent rally since the spring. The red line represents the Bloomberg Consumer Comfort index, which has fallen dramatically and diverged from the S&P since the beginning of summer.
Can this be interpreted as a sharp difference between the expectations of Wall Street and Main Street? Let’s examine some of the most important issues that impact investment and consumer attitudes to find out.
Main Street sentiment is greatly affected by the obvious macro issues that we can easily observe in our daily lives. These include: inflation (which diminishes consumers' buying power), unemployment (which puts breadwinners out of work), housing prices (the most important constituent of American net worth), and gasoline prices (an expenditure that is often made multiple times each week).
Inflation has been benign for several years; it currently is at 1.4 %. Unemployment has plagued the country during the entire tenure of President Obama and it is holding steady at a lofty 8.2%. Housing prices are down dramatically since 1986 when they averaged just over $270,000 nationwide. Today the national average is just under $175,000. Gasoline has come down from its highpoint of $4.00/gallon to $3.72, This cost weighs heavily on many Americans.
Investors look for trends; they want to be in the market when things turn and enjoy the ride up. Given the length of the current economic malaise, many believe a recovery, albeit a short-lived one, is underway. The Dow Jones has come close to record highs reached in 2007, as today it stands at just over 13,000. Also, investors must put money to work, especially hedge funds and money managers. This could have a meaningful impact on the overall market even if only certain areas are attractive to these groups.
The presidential election is giving Main Street new hope for better times. This does not necessarily mean that the average American is expecting a new president to be elected. But, promises are being made by the campaigns of the two contenders. All politicians are optimistic at this point in the election cycle and promise improved conditions after the elections.
Investors are more analytical about politics than Main Street. Personally, I think many smell an upset in the making. A new administration that can deal with partisanship is what the country needs. Obama has had his chance to turn things around and has been a disappointment to even his most loyal followers. Many investors think a new administration will be kinder to business and the people who will be most instrumental in improving economic conditions down the road.
There is positive movement in certain economic indices that are appreciated much more by investors than Wall Street. A 1.5% to 2% growth in the economy is the new 4% that we expected during prosperous times. Investors are getting accustomed to this lower bar for overall conditions; Main Street could care less and believes most of the gains in the economy are going to the wealthy. The latter point relates to the essence of Obama campaign rhetoric.
Investors are gaining confidence that the European Union will soon turn the corner, and that Germany will lead the charge. Expectations have vacillated wildly over the past few years, but time may be running out. Main Street is not interested in Europe.
The slowdown of the Chinese juggernaut to a high single digit rate of growth is another scenario that investors are feeling better about. At first, a rapid decline in Chinese economic fortunes alarmed investors, and a few predicted a calamity. Now most agree that China is still a huge factor with plenty of strength. Once again, Main Street cannot comprehend the impact of Chinese economics on its situation.
Most Americans know that the Federal Reserve has the power to impact the economy, but they are unsure about the specifics. Obviously, Wall Streeters understand this dynamic. The Fed has done a yeoman’s job in supporting the economy with low interest rates for a long period of time. This has tempered the current recession. In fact, most investors believe that the Fed will intervene with guns blazing if the economy experiences a blip. Currently, in an attempt to avoid politicization of its actions, the Fed is putting off all requests for more monetary stimulus before the election.
The stock market has made some impressive gains. This has occurred because investors can sense an economic upsurge. There are many events that can derail this perception, such as another war in the Middle East or unfortunate tax legislation. But the bias is towards optimism at this time.
Main Street is going to have to wait to see higher home prices and a decline in the unemployment rate. These issues, which have a direct impact on average Americans’ wealth perception, will not be on track for some time. For these reasons, the disparity between consumer confidence and investment indices may not correlate for awhile.