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Wall Street vs Main Street: The Stock Market is Not the Economy

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This infographic is available as a poster.

Wall Street vs Main Street

Wall Street vs Main Street

This infographic is available as a poster.

Wall Street vs Main Street

In 2020, the stock market and the economy had a very public break up. The Wall Street vs Main Street divide—the gap between America’s financial markets and the economy—was growing. By the end of the year, the S&P 500 Index closed at a record high. In contrast, 20 million Americans remained unemployed, up from 2 million at the start of the year.

Was 2020 an outlier, or does the performance of the stock market typically diverge from the economy? In this Markets in a Minute chart from New York Life Investments, we show U.S. economic growth and stock market performance over the last four decades, to see how closely the two relate.

GDP Growth and S&P 500 Returns

Here’s how annual GDP growth and S&P 500 Index returns stack up from 1980 to the second quarter of 2021. Both metrics are net of inflation.

YearReal GDP GrowthReal S&P 500 Returns
1980-0.3%13.9%
19812.5%-18.3%
1982-1.8%10.8%
19834.6%13.4%
19847.2%-2.5%
19854.2%23.0%
19863.5%12.9%
19873.5%-2.2%
19884.2%7.9%
19893.7%22.4%
19901.9%-12.4%
1991-0.1%23.4%
19923.5%1.4%
19932.8%4.4%
19944.0%-4.2%
19952.7%31.4%
19963.8%17.2%
19974.4%29.3%
19984.5%25.1%
19994.8%16.6%
20004.1%-13.5%
20011.0%-14.6%
20021.7%-26.0%
20032.9%24.5%
20043.8%5.8%
20053.5%-0.7%
20062.9%11.4%
20071.9%-0.6%
2008-0.1%-39.2%
2009-2.5%21.6%
20102.6%11.1%
20111.6%-3.1%
20122.2%11.6%
20131.8%28.3%
20142.5%10.9%
20153.1%-1.4%
20161.7%7.3%
20172.3%17.2%
20183.0%-8.1%
20192.2%26.8%
2020-3.5%14.9%
Q1 20211.5%4.5%
Q2 20211.6%5.8%

Note: For Q1 and Q2 2021, real GDP growth and inflation rates are quarterly rates and are seasonally adjusted.

More often than not, GDP growth and S&P 500 Index returns have both been positive. The late ‘90s saw particularly strong economic activity and stock performance. According to the White House, economic growth was bolstered by cutting the deficit, modernizing job training, and increasing exports. Meanwhile, increasing investor confidence and the growing tech bubble led to annual stock market returns that exceeded 20%.

In the selected timeframe, only 2008 saw a decline in both the stock market and the economy. This was, of course, caused by the Global Financial Crisis. Banks lent out subprime mortgages, or mortgages to people with impaired credit ratings. These mortgages were then pooled together and repackaged into investments such as mortgage-backed securities (MBS). When interest rates rose and home prices collapsed, this led to mortgage defaults and financial institution bankruptcies as many MBS investments became worthless.

Moving in Opposite Directions

What about when the Wall Street vs Main Street divide grows?

Historically, it has been more common to see positive GDP growth and negative stock performance. For example, real GDP grew by a whopping 7% in 1984 due to “Reaganomics”, such as tax cuts and anti-inflation monetary policy. However, the stock market declined as rising treasury yields of up to 14% made fixed income investments more attractive than equities.

On the other hand, in five of the six years with negative GDP growth, there have been positive stock returns. The most recent example of this is 2020. Real GDP declined by 3.5%, while the S&P 500 returned almost 15% net of inflation.

The Stock Market is not the Economy

There are a number of reasons why the stock market may not necessarily reflect what is happening in the economy.

  • The stock market reflects long-term views. A stock’s price factors in what investors think a company will earn in the future. If investors are confident in the likelihood of an economic recovery, stock prices will likely rise. In contrast, GDP growth is a hard measure of current activity.
  • Sector weightings in the stock market do not reflect their contributions to GDP. The stock market remained resilient in 2020 largely because technology, media, and telecom (TMT) stocks performed well. Despite making up 35% of the market cap of the largest 1,000 U.S. stocks, these companies only account for 8% of U.S. GDP. In contrast, hard-hit companies such as restaurants and gyms generate lots of jobs and contribute materially to GDP. However, many of these businesses accounted for a small portion of the stock market or are not even publicly listed.
  • Fiscal policy lags behind monetary policy. The U.S. Federal Reserve (Fed) can act quickly. For instance, the Fed bought $1.7 trillion of Treasury securities between mid-March and June 2020 to stabilize financial markets. On the other hand, fiscal support requires legislative approvals. The U.S. government initially provided large-scale economic stimulus through the CARES Act in March 2020, but further relief packages were stalled due to political disagreements.

While many factors are at play, the above can help explain the Wall Street vs Main Street divide.

Wall Street vs Main Street: Together and Apart

Over the last 41 years, the economy and the stock market have moved in opposite directions almost as often as they have moved in the same direction. Here’s a summary of their movements from 1980-2020.

# of Years
Stock Growth, GDP Growth22
Stock Decline, GDP Growth13
Stock Growth, GDP Decline5
Stock Decline, GDP Decline1

Since 1980, these time periods of differing performance have never lasted more than three consecutive years. In fact, one economist described the stock market and the unemployment rate as two people walking down the street, tethered by a rope.

”When the rope is slack, they move apart. But they can never get too far away from each other.”
—Roger Farmer, University of Warwick economist

After their public breakup in 2020, the Wall Street vs Main Street divide appears to have healed. In the first two quarters of 2021, both the stock market and the economy saw growth. Perhaps it’s easiest to sum up their relationship in two words: it’s complicated.

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Markets in a Minute

The Average American’s Financial Portfolio by Account Type

From retirement plans to bank accounts, we show the percentage of an American’s financial portfolio that is typically held in each account.

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The Average American’s Financial Portfolio by Account Type

Where does the average American put their money? From retirement plans to banks, the typical financial portfolio includes a variety of accounts.

In this graphic from Morningstar, we explore what percentage of a person’s money is typically held within each account.

Breaking Down a Typical Financial Portfolio

People put the most money in employer retirement plans, which make up nearly two-fifths of the average financial portfolio. Bank accounts, which include checking, savings, and CDs, hold the second-largest percentage of people’s money.

Account Type% of Financial Portfolio
Employer retirement plan38%
Bank account23%
Brokerage/investment account14%
Traditional IRA10%
Roth IRA7%
Crypto wallet/account4%
Education savings account3%
Other1%

Source: Morningstar Voice of the Investor Report 2024, based on 1,261 U.S. respondents.

Outside of employer retirement plans and bank accounts, the average American keeps nearly 40% of their money in accounts that advisors typically help manage. For instance, people also hold a large portion of their assets in investment accounts and IRAs.

Three pages with data visualizations that are zoomed out so they arent fully readable along with the text

Account Insight for Advisors

Given the large focus on retirement accounts in financial portfolios, advisors can clearly communicate how they will help investors achieve their retirement goals. Notably, Americans say that funding retirement accounts is a top financial goal in the next three years (39% of people), second only to reducing debt (40%).

Americans also say that building an emergency fund is one of their financial goals (35%), which can be supported by the money they hold in bank accounts. However, it can be helpful for advisors to educate clients on the lower return potential of savings accounts and CDs. In comparison, advisors can highlight that investment or retirement accounts can hold assets with more potential for building wealth, like mutual funds or ETFs. With this knowledge in mind, clients will be better able to balance short-term and long-term financial goals.

The survey results also highlight the importance of advisors staying up to date on emerging trends and products. People hold 4% of their money in crypto accounts on average, and nearly a quarter of people said they hold crypto assets like bitcoin. Advisors who educate themselves on these assets can more effectively answer investors’ questions.

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5 Factors Linked to Higher Investor Engagement

Engaged investors review their goals often and are more involved in decisions, but which factors are tied to higher investor engagement?

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5 Factors Linked to Higher Investor Engagement

Imagine two investors. One investor reviews their investment goals every quarter and actively makes decisions. The second investor hasn’t reviewed their goals in over a year and doesn’t take part in any investment decisions. Are there traits that the first, more involved investor would be more likely to have?

In this graphic from Morningstar, we explore five factors that are associated with high investor engagement.

Influences on Investor Engagement

Morningstar scores their Investor Engagement Index from a low of zero to a high of 100, which indicates full engagement. In their survey, they discovered five traits that are tied to higher average engagement levels among investors.

FactorInvestor Engagement Index Score (Max = 100)
Financial advisor relationshipDon’t work with financial advisor: 63
Work with financial advisor: 70
Sustainability alignmentNo actions/alignment: 63
Some/full alignment: 74
Trust in AILow trust: 61
High trust: 74
Risk toleranceConservative: 62
Aggressive: 76
Comfort making investment decisionsLow comfort: 42
High comfort: 76

Morningstar’s Investor Engagement Index is equally weighted based on retail investors’ responses to seven questions: feeling informed about composition and performance of investments, frequency of investment portfolio review, involvement in investment decision-making, understanding of investment concepts and financial markets, frequency of goals review, clarity of investment strategy aligning to long-term goals, and frequency of engagement in financial education activities.

Three pages with data visualizations that are zoomed out so they arent fully readable along with the text

On average, people who work with financial advisors, have sustainability alignment, trust AI, and have a high risk tolerance are more engaged.

The starkest contrast was that people with high comfort making investment decisions have engagement levels that are nearly two times higher than those with low comfort. In fact, people with a high comfort level were significantly more likely to say they were knowledgeable about the composition and performance of their investments (84%) vs. those with low comfort (18%).

Personalizing Experiences Based on Engagement

Advisors can consider adjusting their approach depending on an investor’s engagement level. For example, if a client has an aggressive risk tolerance this may indicate the client is more engaged. Based on this, the advisor could check if the client would prefer more frequent portfolio reviews.

On the other hand, soft skills can play a key role for those who are less engaged. People with low comfort making investment decisions indicated that the top ways their financial advisor provides value is through optimizing for growth and risk management (62%), making them feel more secure about their financial future (38%), and offering peace of mind and relief from the stress of money management (30%).

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