Over the past 20 years the two time series have displayed a high degree of co-movement. However, since March 2009 an interesting and unusual divergence has occurred. The S&P 500 Index has rallied by over 50% since the March 2009 bottom whereas consumer confidence has remained at historic low levels.
Why the disconnect? Well, I think stock markets and asset prices in general have been buoyed by the Fed's quantitative easing activities (see this previous post on the relationship between the Fed's Treasury purchasing program and the S&P 500 Index). However, Main Street continues to experience high unemployment and a depressed housing market.
But whatever the reasons for the disconnect the more important question is what comes next? If the S&P 500 Index continues to rise can we expect a rebound in consumer confidence? If consumer confidence remains low or falls further will this drag the S&P 500 Index down? Or is the relationship between stocks and consumer sentiment broken?
My hunch it that the current disconnect between Wall Street and Main Street will continue. I'm not expecting some stellar rebound in consumer confidence or a market collapse. But in the longer run something will have to give.
Enjoy.
