Main Street Over Wall Street?

Ralph 2016-11.jpg

by Ralph Cole, CFA
Director, Equity Strategy and Portfolio Management

Main Street Over Wall Street?

The current economic expansion has been punctuated by record profits for large corporations, and slow job and wage growth for U.S. consumers. As we expected, the benefits of a robust economy are starting to benefit the average American (i.e. Main Street). This process has taken longer than past cycles, but it has finally arrived.

When the Fed started the second quantitative easing program by buying U.S. Treasuries to flood the market with excess cash, they expected it to have a positive effect on asset prices. Indeed, we saw price increases across housing, stocks and fixed income. Quantitative Easing (QE) initially benefited Wall Street rather than Main Street (the average American). The Fed’s assumption was that this would be a trigger to increase business confidence and increase consumer confidence. This transition of confidence took longer than the Fed expected.

Starting in late 2016, we began to see confidence levels among small businesses and consumer accelerate. There was an expectation that tax cuts and reduced regulation would jump start the economy and start benefiting all parts of the U.S. economy. See chart below:

Source: FactSet

Source: FactSet

Confidence continues to ignore ominous tariff-talk from Washington, D.C. It is more difficult for the stock market to ignore tariffs and slowing growth overseas. Large company margins are starting to feel the pressure of higher raw material costs and higher wages. Main Street is finally benefiting from this economic expansion. We call this phenomenon Main Street over Wall Street.

Week in Review and Our Takeaways

Markets ended the week on a sour note as Turkey finds itself in a currency crisis. Neither Turkish President Erdogan nor his finance minister could convince markets that they had a proper plan to stabilize their economy. The tug-of-war between strong historical growth and fears of slowing global growth will continue to play out as long as tariff talk leads our headlines.

Our expectation is for slowing growth in 2019, which in turn will lead to slowing earnings growth. We believe the stock market can continue to move modestly higher in that environment.

  • Consumer and small business confidence remain at robust levels, despite contentious headlines

  • U.S. and international markets were roiled by Turkey’s ongoing financial troubles