Wall Street Versus Main Street (Again)

It’s scarcely worth mentioning on a Friday in June (“If a tree falls in the forest…” and so on), but the final read on University of Michigan sentiment for this month underwhelmed.

At 85.5, the headline gauge printed below the preliminary reading and missed expectations, albeit climbing from the previous month (figure below).

If you’re the optimistic type, you might note that sentiment is the second-“best” since the onset of the pandemic.

If you’re a pessimist, well — just read the text on the chart.

The familiar figure (below) comes with the usual caveat (or “admission,” if you like): It’s a “chart crime” for a variety of reasons, the most obvious of which is that plotting a measure of consumer sentiment against an index of equity prices is a kind of visual non sequitur.

Current conditions fell in June, while expectations improved. We’ve made some headway on the sentiment front, but stocks have essentially doubled from the pandemic nadir — that’s some “substantial forward progress” for you. (That’s a Fed joke, for anyone who missed it.)

And you know, now that I think about it, maybe that visual isn’t a non sequitur. Recall my (humorous) description of the S&P from earlier this month. I called the benchmark,

… an index which, stripped of the niceties, just measures the trajectory and relative value of corporate profits (which capture the business cycle) plus a premium (discount) that corresponds to the current level of euphoria (despair) among market participants, adjusted for hedging flows and buying (selling) associated with a hodgepodge of systematic strategies that adjust exposure based on volatility.

Whatever portion of a benchmark captures the premium (or discount) corresponding to the current level of euphoria (or despair) among market participants could very aptly be plotted with consumer sentiment. Given where valuations are, the gap between market euphoria and consumers’ readily apparent “blah”-ness, so to speak, is probably vast.

But, as BofA’s Michael Hartnett (correctly) observed, “the Fed knows it can only impact business and consumer behavior via credit spreads and stock prices, hence policy is totally directed at Wall Street.”

Therein lies the problem. I’m a broken record on this. It’s not that the vaunted “wealth effect” doesn’t exist (Bernanke wasn’t wrong), it’s just that the transmission channel between central bank largesse and financial asset prices is orders of magnitude more efficient than the trickle-down dynamic from higher asset prices to Main Street.

That means the longer extreme monetary accommodation persists, the wider the disparity between Wall Street and Main Street (figure above, from BofA), even as the latter does benefit incrementally along the way.

“The problem is the Wall Street boom is enormous relative to Main Street’s,” Hartnett added, noting that “US financial assets are now 6.3x GDP.”

It’s “tough,” he wrote, “to solve inequality with QE.”