The Real Disconnect Between Main Street And Wall Street

Includes: DIA, QQQ, SPY
by: Russell Huff

Although I have invested in the markets for well over a decade, I'm not a professional investor by any stretch. Like most part-time investors, sometimes I win and sometimes I lose. I do, however, hold a BS in corporate finance and investment management, as well as an MBA, and like to think I'm as educated and methodical as anyone, particularly when it comes to my money. I am a continual student of economics and the market and I'm always looking to educate myself and gain as much insight as I can. But what I think makes me somewhat unique is that I am a "main streeter" at heart. I like to believe that I am a microcosm of what the average individual and household is experiencing and how the current state of the economy is affecting my spending. From that viewpoint, I can then look at my priorities, take in what the "experts" have to say, and make investment decisions based on what I believe my conditions are at the time. I assure you, this can be far removed from the opinions of Wall Street analyst.

While I will say I somewhat understand the significant move up in the market this year, I have many apprehensions. We've seen an overall stable geopolitical environment coupled with continued low interest rates, decent dividends and corporate earnings, which has pushed money out of the safe house of investments such as cash and bonds. With that inflow, there has been lowered overall market risks which has allowed for continued investment and the subsequent run-ups in equities. I get it, really!

I have read a hundred articles from a cornucopia of experts and non-experts, Bull and Bears alike, in the past few months. I hear about historical P/Es and how fairly valued or undervalued the market is and how much more room there is to run. I hear comparisons to the markets in the 1950s, 1970s, 1999 or 2006. However, in my quest to understand the current bull market, I can't help but notice what I'm not hearing, but from a small portion of analyst. Most seem eager to make historical comparisons to prior bull markets and the associated P/Es, but I hear no one comparing the underlying macro economic conditions for the same time periods. By this I mean true unemployment, taxes, disposable income, inflation, etc. In other words, what is the "real" state of the economy in comparison to historical baselines and what is the condition of the average consumer, because this is what really drives the market, right?

So let me begin by saying that, from my perspective, 2013 has not been a stellar year. The 2% Social Security Tax increase and another year of increased insurance premiums and higher deductibles have eaten into my disposable income. Without getting into much detail, less investments, my personal disposable income went down year-over-year. In addition, my wife happens to teach as an adjunct professor while she is completing her PhD. In the past year, her teaching hours have been cut and capped so that her school isn't obligated to offer her insurance. As I see the propaganda being pushed by both sides of the political spectrum over the Affordable Care Act, all that I really know is how it has negatively impacted me, my wife, and the employees that work for my company. I also see a more significant impact this year as friends and those affected by higher insurance costs post stories on social media. They have begun voicing the impact with the Affordable Care Act on their insurance costs and thus, their disposable income for next year.

I have watched the lagging employment and jobs numbers. I think everyone agrees that in excess of 225,000 jobs monthly is needed, not only to support those coming into the workforce, but to reduce "real" unemployment. This simply hasn't happened and the majority of the new jobs being created are service and part-time positions. Couple this with the fact that the recently released numbers show that college grads coming into the job market have an average of $30,000 in student loans and you can quickly see a disconnect in the amount being earned vs. the debt obligations. I am not even going to approach the potential and subsequent Student Loan Bubble that may occur as a result. But throw the Affordable Care Act in the mix and what I see is less and less disposable income being generated by the new jobs that are added.

Further, the employment participation rate, the percentage of American's capable of holding a job vs. the ones that are actually employed, is at a 35-year low. An estimated 91 million Americans are unemployed. Although the unemployment rate is shown to be 7%, this only reflects those currently receiving benefits, not the true number of Americans unemployed. Adding insult to injury, as of 2012, the median household income is down 8.3% from pre-recession numbers of 2006. Thus, less people are working and the income they are receiving has dwindled. I would say a direct function of the above. Once again, couple that with the increases in taxes and insurance costs, the natural conclusion is that households have less money to spend. We the consumer, are responsible for an estimated 70% of the overall economy. Individual company revenues and earnings are a result of consumer confidence and spending.

The Fed may be targeting a specific unemployment rate, but QE has done nothing to generate additional jobs. In fact, I would argue we started down the path of diminishing returns sometime late in the summer for QE3. The only thing QE is doing at this point is helping the economy from coming to a grinding halt. Let's be absolutely honest, lower interest rates have allowed the average family, which has seen a smaller disposable income level, be able to afford a home or car in the past 2 years. However, the second interest rates climb back, the majority of Americans will once again cease spending on big ticket items. But that's not the worst of it. The interest payments on the ever-increasing national debt will only escalate which means the US Government will be spending more of what it takes in on interest payments alone and not supporting the functions of the Government. All of us know where that usually leads.

Thus, the disconnect. While the Dow and S&P hover at all-time highs and the NASDAQ is at its highest level in 2000, I look at the overall state of my economy, along with those around me, and surmise that things are flat, if not getting worse. No one can argue that we have not seen the historical recovery as we have seen in the past. Past Administrations have realized that the best path to economic recovery is to increase consumer discretionary spending thru incentives, like lower taxes. This in-turn increases overall market demand for products and services, allowing companies to hire which decreases unemployment. Economics 101. This Administration has only increased the tax burden, added to the National Debt, and depleted consumer spending. The Fed has only masked the failings of these policies by lowering rates so that the average battered consumer can continue to spend, in hopes that a real recovery will take place over time, but nothing has really been done.

In summary, I believe the market will take a significant hit in 2014. The realization that the Affordable Care Act is one of the largest tax increases (that is what the Supreme Court ruled after all) the US has seen in quite some time and will be a significant topic of conversation. Younger workers and college grads will simply not sign up for coverage, those who the system is relying on to offset the increase costs the rest of us have seen, foregoing the additional burden in an effort to support themselves, especially given the large amount of loan debt they have accrued. The Fed will begin it's tapering at some point in 2014, increasing interest rates and removing the safety net for investors. That is, at least, the view from my place in the economy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.