Will the Disconnect Between Wall Street & Main Street Continue?

While the disconnect between Wall Street and Main Street seems as old as the creation of the stock market itself and has reached baffling proportions in the past few months, it didn’t really start out that way. The New York Stock Exchange (NYSE) was formed over 200 years under a tree by Wall Street, in what became known as the Buttonwood Agreement, in an attempt to establish some rules after the 1792 financial panic. 

It consisted of some 24 stockbrokers and merchants signing an agreement establishing the parameters that they’d only trade with each other and represent the interests of the public, which meant that the confidence that they had in each other was the confidence that they had in the market. Meaning the success, or failure, of the merchants, AKA Main Street, would be the determining factor in how Wall Street valued the stock. 

We’ve come a long way from this quaint notion; the progression from a true stock exchange which served the purpose of a pathway for companies to raise capital by allowing individuals to buy ‘shares’ as a manner of partaking in company growth and future profits to the dominance of large institutions to near-total financialization of stock-related securities has led to a large disconnect between Wall Street and Main Street. 

The explanation or justification is the now common rejoinder that, “the stock market and the economy are two different things.” When people talk of the ‘real’ economy their thinking of the local restaurants, the barbershop, and dry cleaner.  And it’s not that those businesses aren’t important (they are the backbone of the community and local jobs, it’s that they lack the size and scale to drive a higher correlation between what you see with your own eyes and what the stock market ought to correspondingly look like.  Collectively they make up the economy but have no impact on the stock market that comprises the “SPDR S&P  500 (SPY)” 

The stock market isn’t meant to mirror the economic activity you perceive on your morning walk. Especially now, with people stuck inside and forced to transact on screens. Everything is now taking place away from your eyes, off Main Street, in server rooms, and cloud computing facilities you’ll never walk through or greet your neighbors inside of. Online activity is taking a massive share of all commerce and human attention right now. It isn’t so strange that the companies benefiting most from online activities such as “Amazon (AMZN)” and “Apple (AAPL)” are seeing their stocks rally in response and given their huge weighting the SPY taking the stock market back levels prior to the shutdown. 

Another reason the Wall Street seems able to ignore the Main Street is that while it’s easy to see the unprecedented economic devastation because it’s personal, it’s harder to contextualize the magnitude of the — over $3 trillion in fiscal stimulus and some $5 trillion money creation by the Federal Reserve. Unfortunately, most of the latter is also accruing to corporations rather than individuals. And that’s how Wall Street can keep ignoring Main Street. 

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SPY shares were trading at $293.83 per share on Friday morning, down $1.05 (-0.36%). Year-to-date, SPY has declined -8.17%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Steve Smith

Steve has more than 30 years of investment experience with an expertise in options trading. He’s written for TheStreet.com, Minyanville and currently for Option Sensei. Learn more about Steve’s background, along with links to his most recent articles. More…

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