Does wall street affect main street? examining potential spillovers from investor stock market sentiment to personal consumption expenditures

Investor sentiment rather than aggregate stock wealth predicts changes in non-durable consumer spending across different economic cycles above and beyond housing wealth, labor income, and other macro-economic factors. A statistically and economically significant positive contemporaneous relationship exists between investor sentiment and current nondurable spending, whereas sentiment negatively predicts later spending. Consumers adjust their spending patterns along with sentiment about the stock market, then reverse sentiment-based consumption smoothing when biased market expectations do not come to fruition. Investors’ biased beliefs about stock returns affect consumers purchasing decisions and, thus, the overall .