Market Commentary

Weekly commentary on recent stock market action, with a particular focus on technical analysis.

January 11, 2017

Scott Wren, Senior Global Equity Strategist

Confidence is Key

  • One of the keys to our optimism for the equity market over the last six years has been our expectation that business and consumer confidence would slowly continue to increase.

What it may mean for investors

  • Confidence surged in December to levels not seen since at least 2004. However, at this point, business and consumers have not put their money where their mouth is. If they do, the current cycle could last for several more years.

This week’s release of the latest Small Business Optimism survey from the National Federation of Independent Business (NFIB) showed business owners are now feeling better than they have since December 2004. It is also worth noting that the one-month jump in the survey index was the biggest since 1980. You read that correctly, the post-election December surge in business optimism was the biggest in nearly 37 years. This strategist pays particular attention to the monthly NFIB survey because most analysts consider small businesses to be the main job creators in the American economy.

So equity investors need to pay close attention to what small businesses have to say. Cautious business owners are less likely to add new workers or make investments in new equipment to expand their operations. For most of the current recovery, small business owners have been cautious. The NFIB survey, until the last year or so, showed that many business owners thought the next recession was right around the corner. But what a change a year can bring. We are looking for this increase in optimism to lead to increased rates of business capital spending, which has been sorely lacking in this recovery. And as we have often said in the past, business optimism is the foundation on which consumer confidence is built. We need small businesses building inventory, buying new equipment, and hiring workers.

The December reading on consumer confidence from the Conference Board also showed a big jump from the previous month. This index now stands at its highest reading since August 2001. This is positive news as consumer spending is responsible for more than 70 percent of economic activity in the United States. And happy consumers are much more prone to open their wallets and spend money on discretionary items like cars, furniture, and vacations.

Business and consumer confidence readings, prior to the December surveys, had basically been stalled at good but not great levels since early 2015 after having moved steadily higher from the lows seen during the depths of the “Great Recession.”

We believe the economy will continue to move modestly in the right direction this year. Businesses are steadily hiring workers. Still, the labor market has room for improvement. There are too many part-time workers making up a meaningful portion of many businesses’ work force. Wages have been stagnant for most of this recovery but are now, finally, crawling higher.

As we attempt to look out over the balance of 2017, our analysis suggests business optimism and consumer confidence should stay elevated. The mood seems to have changed over the last eight weeks as more consumers, businesses, and investors appear to believe that American economic growth is more dependable and might pick up a little speed.

While our 2017 gross domestic product (GDP) projection calls for below-trend growth of 2.1 percent, inflation should stay low and the global economy should perform better as 2017 progresses. Our work also suggests that demand should rise for goods in both the domestic and international markets. For businesses and consumers to increase spending and keep the expansion moving ahead, confidence is a necessary ingredient. Over the coming year, confidence is key to the economic outcomes we expect.

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