“Main Street vs Wall Street” is used to describe the contrast of general consumers, investors, or small local businesses with large investment corporations. Main Street represents the small and local ones, including small businesses, general individual investors, and small independent investment firms. Wall Street, as a symbol of high finance, refers to large investment firms, high net-worth investors, and global businesses. There are many conflicts between the two sides, but at the same time, they are also highly interdependent.
Main Street describes the average American investors, small independent businesses and investment institutions, or the real economy. Wall Street represents the high-net-worth investors, large global corporations, or the capital market high finance.
Wall Street firms and Main Street investors can reach mutual benefits by working together, but conflicts still exist between them.
The performance of the real economy (Main Street) and the capital market (Wall Street) are highly correlated most of the time, but sometimes they are disconnected.
What Does Main Street and Wall Street Mean?
In investment, Main Street can be used to describe general individual investors. In contrast, Wall Street represents professional investment managers and security traders. Main Street investors typically invest in small amounts of money. They are considered less sophisticated or rational when making investment decisions.
Wall Street investors are the ones with financial expertise and large amounts of assets under management. Main Street investors may stereotype Wall Street investors like the ones who are trying to manipulate the market to gain abundant profits.
Main Street and Wall Street can also refer to small investment institutions and globally recognized large investment firms. The two types of firms cater to different business focuses. Main Street firms provide financial planning and investment advisory to local individuals or small firms.
Wall Street firms also target high-net-worth individuals and large institutional clients, especially investment banks, private equities, and hedge funds. They assist in mergers and acquisitions (M&A), initial public offering (IPO), and fund management. Goldman Sachs, JP Morgan, and Blackstone are some examples of Wall Street firms.
In economics, Main Street against Wall Street also represents the opposition of the real economy against the capital market, or the middle class (the major players in the real economy), against the investment firms (the major players in the capital market).
Conflicts Between Main Street and Wall Street
As a result of the discrepancy of size, net worth, and financial knowledge, conflicts exist between Main Street and Wall Street. Sometimes, what is favorable to Wall Street hurts Main Street, and what benefits Main Street is unfavorable to Wall Street.
For example, the regulations with a purpose to protect Main Street investors may restrain Wall Street firms’ autonomy and ability to innovate, which lowers Wall Street’s profitability. On the other hand, some Wall Street firms are large enough to be able to lobby for activities and regulations that benefit themselves by sacrificing the welfare of Main Street.
With the “too big to fail” moral hazard, some Wall Street institutions loosen their risk control for higher returns. It also puts Main Street at risk with potential financial crises. During economic depressions, the government’s actions in bailing out financial institutes enlarge the conflict between Main Street and Wall Street, as Main Street thinks the ones who caused the pain should be punished.
Mutual Dependence of Main Street and Wall Street
From the investment perspective, despite the conflicts discussed above, Main Street and Wall Street are highly mutually dependent. Many Wall Street firms provide mutual funds, ETFs, and brokerage services to Main Street investors. Wall Street firms can earn service fees and generate more return by having larger pools of capital for investment.
At the same time, Main Street investors can benefit from the financial expertise of the firms and the diversification of large portfolios. It allows the investors to earn higher returns with lower risks compared with investing by themselves. Nowadays, more and more funds and brokerage platforms are providing no-transaction-fee mutual funds. The reduced investment fees further improve Main Street investors’ net returns.
From an economic perspective, the performances of the real economy and investment are interconnected most of the time. The growth of the real economy stimulates the capital market. When the capital market rallies, investors are motivated by high returns and are more willing to invest or lend. It further supports real economic businesses. Conversely, an economic recession pulls down the performance of Wall Street. The reluctance to invest leads to a negative spiral.
The Disconnection Between Main Street and Wall Street
It is not always the case that Main Street (the real economy) and Wall Street (the capital market) move in the same way. Disconnection happens in some circumstances. For example, during the COVID-19 outbreak, the U.S. economy was badly hurt. The unemployment rate spiked to its highest since the Great Depression. The stock market also plunged at the beginning but recovered much sooner and stronger than the real economy.
One thing that can cause such a disconnection is that fiscal policy lags behind monetary policy. The Federal Reserve enjoys more mobility in monetary policy. The purchase of Treasury securities and the injection of trillions of dollars into the capital market push up the prices of financial assets. It takes longer for financial policy to pass congressional approval and improve the real economy.
Additionally, the performance of Wall Street is also affected by other factors besides the real economy. Investors’ confidence level, industry trend, and historical performance are some examples. The performance of Main Street is an important driver of Wall Street, but not the only driver.