The widely cited ‘disconnect’ between Wall Street and Main Street suddenly

A “Now Hiring” sign advertising jobs at Lowe’s is seen as the spread of the coronavirus disease (COVID-19) continues, in Homestead, Florida, U.S., April 17, 2020.

Marco Bello | Reuters

Quite unexpectedly and rather suddenly, investors have been given a reset, a reprieve, a chance at a fresh start. What should they do with it?

The furious stock-market rally, already the best-ever over 50 trading days through Tuesday, on Friday pulled the S&P 500 just about even for the year. Including dividends, the index has made you money in 2020, after a 37% collapse, a global pandemic and in a still-constrained economy.

With Friday’s burst higher on a far better-than-expected May jobs report, traders rushed to grab more exposure to the recovery scenario, which meant selling Treasury bonds and buying cheaper cyclical stocks that had been the main victims of the lockdown economy.

It brings us to a key “Now what?” moment. Is the market right in accelerating the recovery timeline? Are stocks — which have fed off a deep store of investor skepticism — getting ahead of themselves now that more believe the economy is solidly on the mend?

The closing of many gaps

The ramp in equity indexes has narrowed many real and perceived divides that grew quite wide since the Covid crisis hit.

The improvement in economic indicators from quite-depressed levels has made the stock market’s dramatic surge off the March 23 lows seem a bit less disconnected from the economic fundamentals. Equities always attempt to run ahead of the data, they care more about the direction of change rather than the level of activity, and always climb a wall of worry.

Now, after a 45% rally and a bit more belief that the country is simply moving fast to reopen – whatever the consequences – the widely cited “disconnect” between Wall Street and Main Street appears less confounding.

Other gaps that have closed rapidly: Between stocks and bonds, U.S. indexes and global markets, and the growth and value sectors of the market.

Treasury yields sped higher last week, the 10-year surpassing 0.9% for the first time in two-and-a-half months. The MSCI All-Country World Index Ex-U.S. is up 15% in the past month against 11% for the S&P 500.

And the historic gap between steadier growth stocks and more cyclical value groups has been reduced sharply, though over the past year the Russell 1000 Growth index still has a 25 percentage-point lead over the Russell 1000 Value.

Combined with a powerful demand for corporate credit that has lowered the cost of capital and reloaded company balance sheets, these trends show a global market clicking into gear pricing in an economic revival.

Too much of a good thing?

It’s been a powerful bullish weather system for stocks: Momentum toward an ambitious reopening, pent-up consumer demand, the mass abandonment of economically sensitive stocks, tremendous global stimulus and rampant investor anxiety at a moment when the bearish case on an infection spike and long-term consumer caution simply…

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