Wall Street vs Main Street

Do you keep hearing about the disconnect between Wall Street and Main Street?  Well, the chart below does a nice job of quantifying this disconnect.

The blue line is the S&P 500 Index (Wall Street) and the green line is the Consumer Confidence Present Situations Index (Main Street) which measures overall consumer sentiments toward the present economic situation.

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.

US Stock Sentiment is Extremely Bullish

Here's an interesting chart I came across on the Bespoke Investment Group blog.  It shows the combined bullish sentiment measures of the American Association of Individual Investors and the Investors Intelligence surveys.

The current bullish sentiment towards stocks in the US has only been higher on eight occasions since 1987.

In order to see how this relates to the stock market below I've overlayed the S&P 500 Index on the same chart.

As you can see, some previous extreme bullish sentiment levels have corresponded with significant market highs (1987, 2000, 2007).   However, other extreme readings have merely been followed by a temporary pause or mild pull pack in stock prices.

So what can we expect to follow this current extreme in bullish sentiment? Well, any significant decline in the market will have to overcome some serious headwinds.  We're in the midst of the Santa Claus rally, then there's the combined January effect and 3rd year of the Presidential cycle coming up.  And let's not forget the Fed's continuing POMO activities which appear to be bullish for stock prices.

Of course, on the negative side there's the ongoing debt crisis in Europe.  That alone has the potential to derail the stock market. And as I've pointed out in a previous post, the fact that bond yields are rising pretty much across the board could be an early warning sign of trouble ahead.

My best guess would be that we're in for a temporary pause in the US stock market advance over the next few months.  That will enable the current extreme bullish sentiment to be worked off.  But in these unusual economic times I wouldn't rule out the market's potentail to deal up a big surprise either.

Enjoy.