March 4th 2023: Wall Street vs. Main Street: Explaining the DisconnectThe biggest surprise so far in 2023 has been a renewed interest from retail investors in cryptocurrencies and technology stocks. In 2022, retail investors got hit hard after the enormous equity gains in 2021. The one unexpected consequence of the lockdown in 2020 was a surge in interest in the stock market among individual investors. Many people who were stuck at home with extra time on their hands turned to the stock market as a way to make money or pass the time. Online brokerages such as Robinhood made it easier than ever for novice investors to buy and sell stocks, and social media platforms like Reddit and Twitter created communities of amateur traders who shared information and encouraged each other to buy certain stocks.
Many investors, including myself, saw the drop in stock prices in 2020 as an opportunity to buy stocks at a discount and potentially profit as the economy recovered from recession. Now, as you fast forward to today, investors are buying stocks to profit from a recession that hasn’t even happened yet! It’s important to note that this does create a potential situation that many stocks may become overvalued if the downturn hits corporate profits. This is why I believe there will be a cloud of uncertainty around stocks as the economy slows. The other surprise is the housing market will also not break because there is an expectation that rates will fall in the next year, and housing, as we all know, is one of the best inflation hedges. The Fed has placed so much emphasis on inflation reports and job reports that has helped to create a volatile stock market that is favored by retail traders firing in and out of the market.
Wall Street and Main Street can become disconnected for several reasons. One reason is that the financial markets are forward-looking, meaning that they are always trying to anticipate what will happen in the future. Main Street, on the other hand, is focused on the present and the immediate impact of the economy on their daily lives. As a result, there may be a time lag between what is happening on Wall Street and what is happening on Main Street. Another reason why Wall Street and Main Street get disconnected is that Wall Street is more focused on corporate profits and stock prices, while Main Street is more focused on jobs, wages, and the cost of living. The financial markets can continue to rise even if the economy is not doing well because companies are cutting costs and boosting profits. This can result in a scenario where the stock market is performing well, but people on Main Street are struggling to make ends meet.
The one sector that is not disconnected from reality is in retail. Over the last two weeks, two of the largest home improvement retailers, Home Depot and Lowe’s, warned of softness in the market in recent earnings reports, indicating the year ahead is likely to be a difficult one as inflation weighs on consumers. Walmart had a strong holiday shopping season, but the year ahead will be more challenging for America’s largest retailer. Last week, Walmart forecast slower sales and profit growth, disappointing investors. “The consumer is still very pressured,” Walmart CFO John Rainey told CNBC. “And if you look at economic indicators, balance sheets are running thinner and savings rates are declining relative to previous periods. And so that’s why we take a pretty cautious outlook on the rest of the year.” Target warned that the company continues to operate in “a very challenging environment.” Shares of Target fell sharply as the retail giant flagged a slowdown in spending among its shoppers. “I think there is a recession in consumer electronics,” said Neil Saunders, managing director for analytics firm GlobalData’s retail division. “The spend is down quite consistently, and it’s also down pre-pandemic. It is a sign of wider trends.” Best Buy’s sales sank the entire year as consumers shifted their spending to other purchases, such as travel and entertainment, after stocking up on home electronics during the height of the pandemic.
Despite these challenges, there are still reasons to invest in the stock market. The market may be a bit detached from reality due to inflation and the influx of money from retail investors, but this also presents opportunities for investors. The stock market historically performs well during periods of inflation. Additionally, many companies are still performing well, and there are still growth opportunities.
Going forward, I expect that many households that are not in a strong financial position delay major purchases such as a car or a home until those households feel more financially secure. Additionally, during a recession, people may also shift their focus to paying off debt and building up their savings. They may be more cautious about taking on debt, such as credit cards or loans, and may focus on paying off existing debt. This can impact the economy because it can slow down the velocity of money, as people are not spending as much. The great news is that those people who have saved can now earn over 4.50% on cash, and the stock market is presenting some decent pricing. As I’ve warned in the past, if rates overshoot well over 5%, I expect that the economy would be pushed to its limits.
Overall, I remain positive on the stock market as well as bonds and believe that this market environment is much more favorable than last year. I expect the retail traders to keep this market range-bound with higher elevated volatility. As always, I’ve maintained a diversified portfolio and have a long-term outlook for most of the investments that you own.
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The biggest surprise so far in 2023 has been a renewed interest from retail investors in cryptocurrencies and technology stocks. In 2022, retail investors got hit hard after the enormous equity gains in 2021. The one unexpected consequence of the lockdown in 2020 was a surge in interest in the stock market among individual investors. Many people who were stuck at home with extra time on their hands turned to the stock market as a way to make money or pass the time. Online brokerages such as Robinhood made it easier than ever for novice investors to buy and sell stocks, and social media platforms like Reddit and Twitter created communities of amateur traders who shared information and encouraged each other to buy certain stocks.
Many investors, including myself, saw the drop in stock prices in 2020 as an opportunity to buy stocks at a discount and potentially profit as the economy recovered from recession. Now, as you fast forward to today, investors are buying stocks to profit from a recession that hasn’t even happened yet! It’s important to note that this does create a potential situation that many stocks may become overvalued if the downturn hits corporate profits. This is why I believe there will be a cloud of uncertainty around stocks as the economy slows. The other surprise is the housing market will also not break because there is an expectation that rates will fall in the next year, and housing, as we all know, is one of the best inflation hedges. The Fed has placed so much emphasis on inflation reports and job reports that has helped to create a volatile stock market that is favored by retail traders firing in and out of the market.
Wall Street and Main Street can become disconnected for several reasons. One reason is that the financial markets are forward-looking, meaning that they are always trying to anticipate what will happen in the future. Main Street, on the other hand, is focused on the present and the immediate impact of the economy on their daily lives. As a result, there may be a time lag between what is happening on Wall Street and what is happening on Main Street. Another reason why Wall Street and Main Street get disconnected is that Wall Street is more focused on corporate profits and stock prices, while Main Street is more focused on jobs, wages, and the cost of living. The financial markets can continue to rise even if the economy is not doing well because companies are cutting costs and boosting profits. This can result in a scenario where the stock market is performing well, but people on Main Street are struggling to make ends meet.
The one sector that is not disconnected from reality is in retail. Over the last two weeks, two of the largest home improvement retailers, Home Depot and Lowe’s, warned of softness in the market in recent earnings reports, indicating the year ahead is likely to be a difficult one as inflation weighs on consumers. Walmart had a strong holiday shopping season, but the year ahead will be more challenging for America’s largest retailer. Last week, Walmart forecast slower sales and profit growth, disappointing investors. “The consumer is still very pressured,” Walmart CFO John Rainey told CNBC. “And if you look at economic indicators, balance sheets are running thinner and savings rates are declining relative to previous periods. And so that’s why we take a pretty cautious outlook on the rest of the year.” Target warned that the company continues to operate in “a very challenging environment.” Shares of Target fell sharply as the retail giant flagged a slowdown in spending among its shoppers. “I think there is a recession in consumer electronics,” said Neil Saunders, managing director for analytics firm GlobalData’s retail division. “The spend is down quite consistently, and it’s also down pre-pandemic. It is a sign of wider trends.” Best Buy’s sales sank the entire year as consumers shifted their spending to other purchases, such as travel and entertainment, after stocking up on home electronics during the height of the pandemic.
Despite these challenges, there are still reasons to invest in the stock market. The market may be a bit detached from reality due to inflation and the influx of money from retail investors, but this also presents opportunities for investors. The stock market historically performs well during periods of inflation. Additionally, many companies are still performing well, and there are still growth opportunities.
Going forward, I expect that many households that are not in a strong financial position delay major purchases such as a car or a home until those households feel more financially secure. Additionally, during a recession, people may also shift their focus to paying off debt and building up their savings. They may be more cautious about taking on debt, such as credit cards or loans, and may focus on paying off existing debt. This can impact the economy because it can slow down the velocity of money, as people are not spending as much. The great news is that those people who have saved can now earn over 4.50% on cash, and the stock market is presenting some decent pricing. As I’ve warned in the past, if rates overshoot well over 5%, I expect that the economy would be pushed to its limits.
Overall, I remain positive on the stock market as well as bonds and believe that this market environment is much more favorable than last year. I expect the retail traders to keep this market range-bound with higher elevated volatility. As always, I’ve maintained a diversified portfolio and have a long-term outlook for most of the investments that you own.