“Main Street’s Pain, Wall Street’s Gain” – HKU Macro Workshop
Dr. Yang YOU
Assistant Professor of Finance
HKU Business School
We document an increasingly important role of fiscal policy expectation in stock return responses to macro surprises. In a persistent low-interest-rate economy, when the main street suffers more than expected, investors may expect a more generous federal government support and drive up the aggregate stock prices, leading to a novel “main street pain, wall street gain” phenomenon. We then conduct a cross- sectional analysis using the Covid period, which features an unprecedented fiscal spending in focus. A one standard deviation increase in the Initial Jobless Claims (IJC) surprise (8.7%) significantly predicts higher daily major stock index returns of 26-38 basis points; firms/industries that suffer more – both unemployment surge and financial distress – show higher individual stock returns when bad IJC surprises arrive.
