May 26, 2020

Chart of the Week: Main Street or Wall Street: who’s got this right?

by Fathom Consulting.

Refresh the chart in your browser | Edit the chart in Datastream

The recovery in global equity markets since late March has been remarkable. By close of business on 25 May, the S&P 500 was just over 10% below its mid-February peak. Against the backdrop of a global pandemic, the like of which has not been seen in 100 years, and with many forecasters now expecting double-digit contractions in the size of most major economies, this is a remarkable achievement. Since the early 1990s, the ratio of the S&P 500 to US nominal GDP — a kind of economy-wide PE ratio — has moved almost in lockstep with US consumer confidence. It is not clear whether equities tend to drive consumer sentiment, or whether it is the other way around. In truth, it is likely that both are reacting to something else — namely optimism about the general economic outlook. Since the COVID-19 outbreak, the ratio of the S&P 500 to US nominal GDP has reached an all-time high, while US consumer confidence has plummeted. The main driver of the global equity market rally since late March appears to have been massive liquidity injections from the Fed, the ECB and other major central banks, rather than a material improvement in the economic outlook. At some point, the close relationship between Main Street and Wall Street is likely to reassert itself. The risk is that Wall Street may need to do some of the adjustment.

__________________________________________________________________________________

Datastream

Financial time series database which allows you to identify and examine trends, generate and test ideas and develop view points on the market.

Refinitiv offers the world’s most comprehensive historical database for numerical macroeconomic and cross-asset financial data which started in the 1950s and has grown into an indispensable resource for financial professionals. Find out more.

Get In Touch

Subscribe

We have updated our Privacy Statement. Before you continue, please read our new Privacy Statement and familiarize yourself with the terms.×