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Market Commentary

April 22, 2015

Scott L. Wren, Senior Global Equity Strategist

Weekly update on current stock market action

  • The Federal Reserve's (Fed) strategy of boosting stock prices in this recovery has been successful as the S&P 500 trades very close to its record high but consumer and business spending has lagged.

What it may mean for investors

  • We believe the modest growth/modest inflation recovery we have seen over the last five years is likely to continue in at least the intermediate term. Stocks can do well in this type of environment as growth appears dependable and inflation is not causing the Fed to dramatically alter monetary policy.

Yes, I'm Afraid it Really is Different This Time

It wasn’t all that long ago when the Fed could control the economy to a great degree. The Fed only had 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 cheaper to borrow money. Consumers cooperated, went on a spending spree, and almost without question, six or nine months down the road the economy looked a lot better. For those of you longing for the good old days, this strategist can sympathize.

The stock market, of course, would have moved well ahead of the economy. Investors would have been in celebration mode for quite a while before it was clear the economy had picked up. That is because the equity market is frequently a good indicator of what the economy is going to look like in the future. The stock market is usually good at anticipating better (or worse) times on the horizon. Unlike the Fed, the equity market isn’t "data dependent" and doesn't wait for proof that things are better (or worse) before making a move.

But this cycle has been far different than most. The Fed pulled the lever, and then pulled it some more, and not much happened. Then it pulled the lever one more time, just for good measure. Interest rates dropped to the floor, but the economy only crawled forward at a slow pace. American consumers, much to many economists’ surprise, did not go on a spending spree. In fact, nearly six years into the current recovery, the domestic economy could squeeze out only a 2.4 percent growth rate last year, well below the longer-term average. And as far as the fears of Fed-induced high inflation from all of this "free" money? Well much to the dismay of many pundits and elected officials in Washington, the rate of inflation has dropped like a rock.

Instead, many 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. In other words, some consumers did not have the option to borrow money and spend it because they had defaulted on home loans, credit card balances, and other forms of debt. Typically, creditors are not 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 Fed's ability to control the economy and push growth (and inflation) meaningfully higher is limited. The reason? It's more simplistic than you might think. No matter how low the level of interest rates, you can't force consumers and businesses to borrow and spend. And American consumers and businesses have not been in the mood to borrow and spend in this recovery. I say this cautiously and with history not on my side, but yes, I'm afraid it really is different this time.

Scott WrenAbout Scott Wren

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.

*As of Sept. 30, 2014


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