Following the initial steep COVID-19 selloff, markets have been able regain some momentum. For instance, U.S. and Canadian indexes are up almost 40 percent since the March lows, and major European markets are up 30 percent. Equity markets are dominated by big corporations, so it’s not surprising that major indexes may not show the same challenges faced by mom-and-pop companies.

So why does America’s Main Street seem so disconnected from Wall Street? Kelly Bogdanova, Vice President and Portfolio Analyst shares some interesting thoughts on the matter.

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A brief summary:

Investor optimism, policy pragmatism

• Markets look forward, not backward, and they’re concluding that the current economic challenges will be temporary.
• The U.S. market seems to be assuming that the domestic economy and corporate profits will be back to 2019 levels sometime next year (we think it will be a little later).
• The Federal Reserve has thrown more than the kitchen sink at the severe economic crisis, backstopping the credit market for the first time in history. In hindsight, this has been a boon for the stock market and has supported valuations.
• Fiscal stimulus has also helped boost the market, in our view.

Multinationals (often) move markets more

In reality, Wall Street and Main Street don’t always move at the same pace, especially when major non-market-related events occur. This has been the case throughout history. The profit trends and future prospects of companies within “the market” can diverge at times from wider problems in society, especially during unique challenges such as pandemic lockdowns, social justice struggles, or crises in government.

 

The road ahead to economic recovery

Even during economic expansion cycles, gaps can open up between Wall Street and Main Street. S&P 500 gains can far outpace GDP growth. In seven of the 10 economic expansion cycles since 1949, the S&P 500 price return exceeded the expansion in nominal GDP, according to Bloomberg Intelligence. In four of those cases, the market overshot GDP by wide margins. And while the S&P 500 and GDP tend to move together directionally over the longer term—rising, falling, or treading water—they can diverge in the shorter term.