The markets are back to betting on Wall Street over Main Street.
After playing earlier this year for a pickup in the real economy that would fatten worker paychecks and spur a long-sought rise in interest rates, investors lately have returned to the old low-growth, easy-money game plan that makes financial assets and their owners the big winners.
The Dow is at a new high, junk bonds are on track for another strong year and shares of investment banks, brokerage houses, securities exchanges and asset managers have quietly been leading a strong financial sector. Blackrock, Invesco, State Street, Charles Schwab, E*Trade and CBOE Holdings are all up at least 15 percent the past three months, compared to just 5 percent for the S&P 500.
Meantime, Main Street retail stocks have been pulverized. The basket of traditional chain-store stocks that Bespoke Investment Group calls its Death by Amazon index hit a four-and-a-half-year low this week, before Thursday's decent little bounce in the group on less-bad-than-feared guidance from Target and plenty of short-covering. Auto stocks, truckers and even packaged-food stocks — each a play on household spending vigor, in one form or another — have been laggards all year.
And it's not just the relative sector performance of the stock market sending this Wall Street-over-Main Street message.
In her two days of Congressional testimony, Federal Reserve Chair Janet Yellen conceded frustration with the pace of wage growth, which has ebbed in recent months even as unemployment remains below 4.4 percent. The Atlanta Fed wage growth tracker — which measures earnings for the same job over time, peaked late last year. And, perhaps related, the Gallup Economic Confidence index has hit year-to-date lows this month, with consumers' forward economic outlook dragging it down.
Bank of America Merrill Lynch strategist Michael Hartnett makes the case that we are undergoing the "Amazonification" of Main Street and the "Japanification" of Wall Street. By this he means, the real economy is caught in a slow-growth pattern of "excess debt, aging demographics, technological disruption" that "continues to cap inflation and interest rates." The downward pressure on the cost of money, worker incomes and inflation has been undisturbed by halting efforts at fiscal reforms and stimulus — and Wall Street feeds off the cheap money and rewards dominant companies riding the deflationary boom with higher valuations.
I've written recently about how the markets have priced the handful of acclaimed global New Economy winners with tremendous valuations that imply a kind of worldwide oligopolistic Corporatocracy is settling into place. While the giants of the Nasdaq did suffer a quick 5 percent pullback in May and June, they have already recovered and returned to favor.
Market leadership by growth-technology and capital-markets-related stocks is, on balance, a positive sign for stocks in general. And, indeed, global industrial stocks, transportation names and world indexes (including emerging markets) rising along with them speak to a pretty sturdy setup for investors.
But does the move need to be a zero-sum game, with Main Street necessarily struggling in proportion to Wall Street celebration?
The pop in discarded retail stocks Thursday at least raises the prospect that the Death of the Mall theme has been overplayed a bit in the short term.
The big names in the group that are the likeliest survivors — Macy's, Gap, Target, Kohl's — all trade at or near the depressed multiples of their cash flow they fetched around the 2008 bear-market bottom. Short interest is heavy, dividend yields are high and investor sentiment is despondent.
As many have noted, ProShares just filed to offer a series of ETFs designed top profit from the pain in bricks-and-mortar retail stocks, a move begging to be interpreted as a contrarian sign of a possible bottom in the sector.
Jeff de Graaf of Renaissance Macro Advisors this week flagged some consumer-durables and apparel stocks that have just reversed from severe downturns and seem ripe for a contrary upside play. His indicator, he says, "tells us is that risk-adjusted returns over the long‐term [for these stocks] have been so bad that the prospect for come reversion to the market is likely." Names he cites as decent candidates for such a rebound: Coach, PVH and Nike.
The burden of proof is pretty high on any enduring revival of traditional retail and consumer stocks beyond such a tactical reversal trade, of course. And the prospects for a Main Street economy that "runs hot," as was the hope coming into this year, don't appear all that strong at the moment.
But given a pretty good job-growth report last week, very low expectations for any fiscal help out of DC and anecdotal signs from some corporate executives that they now need to offer better pay to attract workers, it might not take much for the sentiment pendulum to start swinging back toward Main Street before too long.