Main Street Beating Wall Street Just Beginning at BofA Merrill

  • Regional bank stocks rise, securities firms decline this year
  • Hartnett sees `massive policy shift' spurring labor revival

Favoring Main Street over Wall Street has become a broader theme for Michael Hartnett, chief investment strategist at Bank of America Corp.’s Merrill Lynch, now that an earlier call along these lines is paying off.

The chart below revisits a recommendation Hartnett made in a report last December: buying the shares of regional banks (Main Street) and betting against securities firms (Wall Street) through short sales, which had “the potential to be the trade of 2015.”

Both sides of the trade are paying off so far this year. The KBW Regional Banking Index gained 5.7 percent through yesterday, while the NYSE Arca Securities Broker/Dealer Index dropped 8.9 percent.

Hartnett cited the two indexes in December, and mentioned them again in a report yesterday. This time, the New York-based strategist included a chart that used the U.S. labor-force participation rate to represent Main Street and an index of government and corporate bonds and stocks for Wall Street. The participation rate dropped last month to 62.4 percent, the lowest level since October 1977.

“Investors should anticipate (a) massive policy shift,” he wrote, as the prospect of recession causes government spending to replace central-bank action as a catalyst for economic growth in the U.S., the European Union and Japan. The transition would be a plus for inflation-linked debt, gold and commodities as well as job growth, he wrote.

The contrasting fortunes of Main Street and Wall Street may help discount retailers and dollar-store chains and weigh on makers and sellers of luxury items, Hartnett wrote. He cited indexes of North American mass merchants and global luxury-goods companies, as compiled by Bloomberg Intelligence.

Before it's here, it's on the Bloomberg Terminal.