Are you capable of holding two opposing thoughts in your head?

Are you capable of holding two opposing thoughts in your head?

If not, this year’s market environment is not for you.

The vast majority of investors have trouble reconciling the idea that the stock market is not the economy. It’s totally counterintuitive to see stocks rally on bad economic data and then give back those gains when the data undeniably improves.

We’re in a moment right now where everything that Main Street loves, Wall Street hates:

♣ Consider the plunge in oil and gasoline prices – a nightmare for the capital markets overall as earnings and revenues take a hit every time energy profit estimates and industrial CapEx are ratcheted down another notch. This makes overall S&P 500 profit targets harder to hit. But it’s fantastic for consumer confidence, saving and spending, virtually everywhere outside of Houston and Bismarck.

♣ Consider the 2.5% year-over-year rise in average weekly earnings, the voluntary and involuntary minimum wage hikes for retail and fast food workers across the country, the 5.1% employment rate and the need to pay up for skilled labor as college educated unemployment drops to an incredible 2.5%. These are all bad omens for corporate profitability in the short-term. How can margins rise when employment costs, held down for so long, are now busting at the seams?

♣ Consider the possibility of higher interest rates, now that the economy is coming out of ICU. That’s a negative for the buyback-n-dividend craze, which has enabled Wall Street and the executive class to continue to boom regardless of conditions in the real economy.

Lower energy costs, higher wages and a normalized interest rate for savers are exactly what the nation needed to see confidence return outside of the stock market. Main Street wins under these circumstances and Wall Street loses (or, in a best case scenario, wins later as psychology shifts).

Are you capable of balancing these two ideas in your head at once? If so, they will keep you on an even keel as the fortunes of the real economy and the financial one diverge.

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