A Shocking Divergence Between Main Street & Wall Street

Posted On January 5, 2022 3:27 pm

The new year has started off with some surprising divergences in both people’s behavior and stock price action. 

From a big picture perspective, we talked about how Wall Street doesn’t necessarily reflect Mainstreet, which became abundantly clear during the first few months of the pandemic. Through most of 2020, while businesses struggled through lockdowns the major stock indices, mostly powered by the mega-cap tech names, went straight up and began hitting all-time highs on a regular basis. 

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By the time vaccines started being given in early 2021 — allowing for reopening and unleashed pent-up demand — Main Street was seemingly aligning with Wall Street bullishness as an economic activity; helping to drive GDP growth to its highest since post-World War II. 

But now with inflation remaining stubbornly high and Omicron spreading like wildfire, it seems we’re once again at a place where Main Street is heading in the opposite direction as Wall Street. 

While the University of Michigan Consumer Confidence Index has never been a great short-term predictor – since people have a tendency to say one thing and do another – it has generally tracked the stock market for 10-plus years. 

However, that correlation broke at the onset of Covid.  What’s confusing is that they continue to decouple.  Consumer Confidence actually made a new low below the March 2020 level while Investor Sentiment continues to move higher.  

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​​s&p500 investor sentiment consumer confiedence

I suppose what drives prospects, profits, and Fortune 500 companies may not be reflective and even conflict with the majority of individuals’ financial situations.  

CEO confidence is high due to profit margins expanding, stock buybacks surging again, and the ability to raise prices at will occurs; due to the concentration of industries.

Meanwhile, consumer confidence is sinking due to prices rising faster than income, the end of government stimulus checks, and loan forgiveness. This has led to an increase in debt loads with schools starting to close down again. 

This macro divergence doesn’t really provide us with any specific actionable trade ideas. However, it’s important to have a 10,000-foot landscape view to help us identify how we might maneuver among the trees. 

Tomorrow, I’ll focus on a more actionable divergence among specific stock and sector performance.  Mainly, how high valuation shares and profitless tech companies are being burnt to the ground while old-line legacy companies have seen their stocks catch fire.  And by fire, I mean “hot” in a good way. 

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.