The Wall Street vs. Main Street narrative is about to flip

Wall Street has been smoking Main Street since the global financial crisis.

Bank of America Merrill Lynch’s Michael Hartnett captures this narrative crudely by charting the total returns of US stocks and bonds (Wall Street) against the labour force participation rate (Main Street).

The labour force participation rate represents the percentage of American civilians over 16 either working or looking for work. Over the past eight-ish years, the bull market in stocks and bonds has been profitable for Wall Street and the few investors in the market. On the flip side, the labour force participation rate is at its lowest level in 38 years.

But it looks like things might start to reverse course, according to Hartnett and his team

“We remain long Main Street, short Wall Street,” he wrote in a note to clients on Sunday.

“The cyclical tailwinds for the global consumer are considerable (low oil, low rates & low unemployment rates),” he noted. “Credit availability has improved. And while there remain secular reasons to save (demographics & disruption), in 2016 the political winds are likely to shift further toward Main Street given the ‘inequality’ of recent years: for every 1 job created in the US this decade, US corporations have spent $US296,000 on stock buybacks.”

For now, corporations continue to push the limits of what the public and policymakers will take. The pace of buybacks remain very high, and the corporate manoeuvring to dodge taxes continues to blow the mind.

But with presidential elections around the corner, the rhetoric is sure to heat up.

“Tax & wage policies should favour the long Main Street, short Wall Street trade,” Hartnett said.

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