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Sitting on Their Hands

Wells Fargo Investment Institute - April 26, 2017

Analysis and outlook for the equity market

  • Consumer and business confidence has surged to the highest levels seen in at least 12 years.  However, this optimism has not yet resulted in a surge of additional spending.

What it may mean for investors

  • The stock market is in a wait and see mode while our elected officials debate proposals which might help the economy move forward.  We recommend you stay invested.

Download the report (PDF)

If you looked only at the monthly consumer confidence and business optimism surveys that have been published since last November’s election, it would be easy to assume that a lot of additional money would currently be flowing through the economy as spending ramped up in the face of a much more positive outlook. After all, the reading of consumer confidence from the Conference Board recently hit its highest level in more than 16 years. And the Small Business Optimism Survey from the National Federation of Independent Business (NFIB) just posted its highest reading in more than 12 years. But in reality, if you made that increased-spending assumption, you would be wrong. As the statistics within a variety of economic reports have shown over the last four or five months, even though consumers and businesses may be feeling much better about the future, they have not put their money where their mouth is by meaningfully increasing spending—at least not yet.

The reason, at least in this strategist’s opinion, is really pretty easy to understand. And it all leads back to something we have discussed many times over the years. In recent months, we have been pounding the table voicing our view that nothing that will have a big impact on the economy in 2017 is going to get done easily or quickly in Washington. We have argued that many of the pro-growth proposals that “might” and “could” eventually be implemented, like corporate and individual tax cuts, increased infrastructure spending, and less regulation, were likely 2018, 2019, and 2020 stories—not this year’s. And we continue to make that argument. Because unfortunately, nothing seems to move quickly in our nation’s capital and that has been and is currently a problem for both businesses and consumers. They need to see some action, and they need to see it very soon before they will change their spending behavior.

This cautious attitude makes sense. We have been stuck in a modest-growth environment for basically seven years. Small business surveys over the first five years of that time period consistently revealed fears that another recession was right around the corner. Business owners clearly feel better now but want to see corporate and individual tax reductions actually becoming law and signs of an accelerated pace of consumer spending before boosting capital investment and hiring a bunch of additional employees. And yes, you can argue that consumers are boosting spending as housing markets in many parts of the country are on fire, but a good portion of that is likely due to fears that interest rates are going higher as the Federal Reserve shifts into rate-hike mode over the next couple of years. (Apparently the Treasury bond market doesn’t agree with that theory as yields have fallen since the March rate hike.) A quick glance at retail sales in recent months shows a continuation of an upward path but no “surge.”

So like it or not, first-quarter economic growth will probably not be good. The data will likely show that business capital spending was not great and consumers were holding their discretionary money a little tighter than any of us would prefer. In other words, instead of the jump in confidence leading to a big increase in spending, consumers and businesses are sitting on their hands waiting for our elected officials to produce results.