Worriers vs. Warriors

By Dr. Peter Linneman

Wall Street is in a panic these days, beset with worries about a rising dollar, slowing Chinese growth, plummeting oil prices, a possible recession in the U.S. and increasing interest rates. In the midst of this frenzy, stocks tumbled 12 percent between the end of last year and Feb. 11, when prices hit a two-year low.

And as Wall Street jitters caused a flight to safety, 10-year Treasury yields fell 20 basis points (bps) and mortgage spreads widened by 100-200 bps. What’s more, nervous lenders pulled back on loan originations—especially for CMBS—by 5 to 10 percent.

Yet while Wall Street is in a complete tizzy, Main Street is keeping its head on straight. Consumer confidence remains stable and hovers near its historical average. The economy continues to add jobs at a healthy pace, wages are growing faster than inflation, unemployment claims are low, the jobless rate and the duration of unemployment are declining and consumer spending remains solid. Thus, while Wall Street fears the apocalypse, Main Street keeps rolling merrily along.

This disconnect, however, does raise a crucial question: “Who’s right: Wall Street or Main Street?” Our bets are firmly on Main Street.

China Syndrome

Let’s start with Wall Street’s concern about China. First, the Asian giant’s slowing growth is not exactly a news flash. On the contrary, the trend has slowly evolved over the past decade. Furthermore, today’s 7 percent rate represents more real growth than a 10 percent rate did just eight years ago. China has its economic challenges, but failure to generate growth is not among them.

As to Wall Street’s worries that the strengthening dollar will short-circuit the economy here at home, it is essential to understand that the dollar’s strength is a product of the strong U.S. economy, much like high ticket prices to Bruce Springsteen and Paul McCartney concerts reflect their enormous popularity.

And just as high prices mute—but do not eliminate—the demand to see those superstars, the muscular dollar mutes economic growth, but does not eliminate it.

Thus, while the rising dollar keeps many Wall Streeters up at night, Main Street’s denizens are ecstatic at the thought that they can finally afford that European vacation this year.

The sky isn’t falling

Regarding Wall Street’s fear that the precipitous drop in global oil prices will trigger a recession here, the decline, on net, puts an extra 75 bps of GDP in U.S. pockets. In marked contrast to Wall Street’s panic, Main Street revels in additional spending power that approaches nearly $130 billion annually. To put this in perspective, the decline in oil prices is equivalent on an annual basis to roughly half of real per-capita GDP growth annually during the recovery.

Another Wall Street obsession is a 25-75 bp rate hike by the Federal Reserve. But such increases matter only to Wall Street firms whose leveraged profitability hinges on those small changes. On Wall Street, such fluctuations are like life-and-death matters, but on Main Street, they’re merely rounding errors.

The factors that drive Wall Street and Main street are strikingly different. While Wall Street lives on the razor edge of “fear versus greed,” watching nervously for signs of a rush to the exits, Main Street stays focused on basic questions: Do I have a job, and is my spending power getting stronger? Can I afford a car, a vacation, daily necessities?

These concerns rarely overlap Wall Street’s obsession with being the first to act when the pendulum starts moving. Today’s answers to Main Street’s basic questions largely fall in the good-to-neutral range, as Wall Street shifts from greed to fear.

Dr. Peter Linneman is a principal & founder of Linneman Associates and professor emeritus at the Wharton School of Business at the University of Pennsylvania. Follow him on Twitter: @P_Linneman