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Behind the Sentiment Disparity: Main Street vs. Wall Street

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By Dian L. Chu, Economic Forecasts & Opinions

According to a gauge derived from data compiled by The American Association of Individual Investors (AAII), bullishness on U.S. stocks is beginning to emerge after the market's rally in the past year.

The latest AAII Sentiment Survey reading shows optimists outweighed pessimists for the first time since January 2008, three months after the previous bull market ended. (See Chartfrom Bloomberg)

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A Disparity in Sentiment

In contrast to the cheery mood of the markets, the latest readings from consumers and small business owners indicate economic sentiment isn't improving, despite signs of a factory rebound and less gloom on the labor front.

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The National Federation of Independent Business said its optimism index for small business owners fell back in February to its December reading. The IBD/TIPP Economic Optimism Index dropped 3% in March, well below its average of the past year.

Meanwhile, The U.S. consumer sentiment also dipped in early March, according to the University of Michigan Consumer Sentiment Index.

'Never Seen Anything Like It'

This divergence has got the Wall Street scratching its collective head. In a recent MarketWatch article, Mr. Mark Hulbert cited a Wall Street advisoras saying:
"The disparity between hope on Wall Street and malaise on Main Street continues. I have never seen anything like it."
In short, the disparity may be deciphered in one word liquidity which Wall Street has plenty of from government handouts, while main street remains strapped from the bleak prospects in both the job and housing markets.

Behind The Productivity and Profit Gain

Corporations are now seeing higher profits mainly through cost, inventory, and workforce reductions. It is not a coincidence that the U.S. productivity rose by an outsized 6.9% last quarter, while the cash U.S. corporations have on hand equals about one-tenth of the annualized gross domestic product (GDP) over the past twelvemonths -- near a record high, according to an IHS analysis of Commerce Department data.

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This type of "growth" is not real and entirely unsustainable, and at some point, companies won't be able to get their employees to keep producing more.

For Middle America, the stagnant housing market and the lack of positive job growth are two factors hindering a more robust reading for consumer sentiment. An analysis of these two factors will offer some clues to Wall Street as to what Main Street is concerned about regarding the economy.

Home Not So Sweet Home

In the fourth quarter, national home prices fell 1.1% compared with the third quarter, according to Standard & Poor's. Meanwhile, nearly one in four of all Americans with a mortgage - more than 11.3 million homeowners - are underwater.

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Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to several leading investment websites. Ms. Chu's work is also syndicated to media outlets worldwide. She blogs at Economic (more...)

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