Improving Sentiment

The stock market's surge following the surprise election result last month has many investors still feeling shell-shocked. Some are even feeling conflicted: Is it okay that my investments are going up because the stock market is cheering the person I didn't vote for? Maybe a more prudent question is how long will the market's "Trump-bump" last? While the answers are subjective, there's more to the recent run-up than just President-Elect Trump.

Our economy had been slowly but surely getting stronger heading into the election. But for a variety of reasons the growth rate couldn't seem to sustain itself beyond a few quarters at a time. This started to change and seemed to come together near Election Day. The coincidental timing of positive economic news provided (and continues to provide) a tailwind for the market's upsurge. Yes, the election result ignited a fire, but most of the fuel was already there.

The U.S. Bureau of Economic Analysis tracks economic activity across the country. The BEA's annualized GDP numbers through the 3rd quarter were recently revised up to 3.2%. While that might not sound like a lot, this continued a positive trend.

Corporate profits have been growing by a healthy margin. Unemployment is now at a very low 4.6% (almost as low as ten years ago, and down from a high of 10% in 2009). Consumer confidence and small business optimism has ticked up. All of this was in the mix prior to the election, but some factors were accentuated by it.

So, for investors who are feeling conflicted, some portion of the market's recent performance is due to Trump and some is due to improving economic fundamentals. Time will tell what the breakdown is, but hopefully it's more of the latter than the former.

Stock and bond prices are based on fundamentals but investors, at least in the short term, are prone to so-called animal spirits. While investor bullishness and consumer confidence is higher, we're a distance from wild and exuberant levels.

Along these lines, check out the following excerpts from recent reports by Bespoke Investment Group and the University of Michigan Consumer Confidence Poll. Both are interesting in how they detail recent changes in investor and consumer sentiment.

The first chart shows this month's reading with each response broken out for the subset of respondents who report themselves as investors and their view of the stock market. While roughly 45% of respondents have a neutral view of the market, about 38% have a positive view and only about 15% have a negative view. It is worth noting the breakdown of these responses because although this month's reading is the strongest we've seen in our survey's history, it is still only slightly above neutral.

The second chart shows our highest ever unrounded tracker reading (3.274) with only two readings from spring of 2015 matching this number on a rounded basis. Previously, those high ratings for stock market optimism occurred right near an intermediate term peak in the market that stood for over a year. Based on our survey's history and the recent price action since the US elections, we think it's fair to describe this enthusiasm for equities as a contrarian signal that things might be getting carried away. Whether it's the election of a Republican, simply price action, positioning or seasonality, the current run higher in equities seems slightly excessive and the enthusiasm shown by our respondents seems to confirm that suspicion. However, again it is worth taking into account that although this is the strongest reading we have seen to date, it still comes in only slightly above 3, which is a neutral rating.

From Richard Curtain, of the University of Michigan Consumer Confidence Poll:

Consumer confidence surged in early December to just one-tenth of an Index point below the 2015 peak—which was the highest level since the start of 2004. The surge was largely due to consumers' initial reactions to Trump's surprise victory. When asked what news they had heard of recent economic developments, more consumers spontaneously mentioned the expected positive impact of new economic policies than ever before recorded in the long history of the surveys. To be sure, an equal number volunteered negative judgments about prospective economic policies, but the frequency of those negative references was less than half its prior peak levels whereas positive references were about twice its prior peak. There were a few exceptions to the early December surge in optimism, mainly among those with a college degree and among residents of the Northeast, although no group has adopted a pessimistic outlook for the economy. The most important implication of the increase in optimism is that it has raised expectations for the performance of the economy. President-elect Trump must provide early evidence of positive economic growth as well as act to keep positive consumer expectations aligned with performance. Either too slow growth or too high expectations represent barriers to maintaining high levels of consumer confidence. Until specific policies are proposed, there is no reason to alter the 2017 forecast of 2.5% for real consumption.

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