February 10, 2016
Scott L. Wren, Senior Global Equity Strategist
Analysis and outlook for the equity market
- Federal Reserve (Fed) monetary policy has allowed the economy to grow only at a modest pace in the wake of the financial crisis of the last decade. This is likely to not change any time soon.
What it may mean for investors
- Our work does not suggest the U.S. economy is on the verge of recession. We look for the economic fundamentals to remain largely unchanged this year and see corporate earnings growth remaining sluggish but positive.
It wasn’t all that long ago when the Fed could control the economy to a great degree. The Fed had only a few levers that it could pull, but those proved quite effective in the midst of a typical economic cycle. Economy moving a little too slowly? Just pull the interest-rate lever, and make it a bit less expensive to borrow money. Consumers generally cooperated, went on a spending spree, and usually six or nine months down the road the economy looked a lot better. If you are longing for the good old days, this strategist can sympathize.
Lately, we have been hearing from many market pundits that the Fed (and other major global central banks for that matter) should not be expected to do all the “heavy lifting.” These pundits say we need the fiscal side of the equation to kick in. In other words, while buzzwords such as “tax reform” and “business investment” are frequently loudly repeated, we believe what they really mean is Congress and the President should do more deficit spending to jump-start the economy. But in this election year, a strategy of big deficit spending is a hard sell to many voters.
But this cycle has been far different than most. The Fed pulled the interest rate lever, and then pulled it a few more times, but not much happened. Interest rates did drop to the floor, but the economy only crawled forward at a very modest pace. American consumers, much to the surprise of many economists, did not go on a spending spree. In fact, nearly seven years into the current recovery, the domestic economy, in the end, likely squeezed out only a 2.4 percent growth rate last year after all the numbers are finalized. That is well below the longer-term average. And what about the fears that all of this nearly “free” money would lead to Fed-induced high inflation? Well, much to the dismay of many pundits and elected officials in Washington, the rate of inflation dropped like a rock.
Instead, consumers did something unexpected: They increased their savings rate and tried to pay down debt. Granted, not all of this was by choice. Much of the consumer debt that has been eliminated since the depths of the financial crisis was written off by creditors. That means some consumers did not have the option to borrow money and spend because they had defaulted on home loans, credit card balances, and other forms of debt. Creditors are not typically anxious to lend money to those who have previously not paid back their debts.
The lesson learned is that in the wake of the bursting of a gigantic credit bubble like the housing-related crisis of the last decade, the Federal Reserve’s ability to control the economy and push growth (and inflation) meaningfully higher is limited. The fact is, no matter how low the level of interest rates, you can’t force consumers and businesses to borrow and spend. And they have not been in the mood to borrow and spend during most of this recovery. That has been a huge headwind for growth. Many had great expectations that our central bankers and elected officials could propel the economy forward at an above-trend pace. It’s unlikely those expectations will be met in this cycle.
Scott Wren is a senior global equity strategist for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.
Mr. Wren produces strategy and guidance recommendations for global equities. With his knowledge of the financial markets, he is often quoted in national media outlets including Reuters, The Chicago Tribune, The Los Angeles Times, The Washington Post, The Associated Press, and The Wall Street Journal. He has appeared in interviews on CNBC, Bloomberg TV, Fox Business News, and Nightly Business Report. Prior to joining Wells Fargo Advisors predecessor A.G. Edwards in 1998, Mr. Wren worked as a senior foreign exchange dealer for The Boatmen’s National Bank of St. Louis. He began his career on the trading floor of the Chicago Mercantile Exchange and has more than 25 years of experience in financial services.
He received a Bachelor of Science in Business Administration from the University of Kansas and a Master of Finance from Saint Louis University. He is located in St. Louis, Missouri.
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