Market Commentary

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

September 28, 2016

Scott Wren, Senior Global Equity Strategist

Promises, Promises

  • The fiscal problems related to entitlement overpromising by politicians are likely a longer term issue but are starting to show up now in some states like Illinois.

What it may mean for investors

  • Over time, as is the current case in many European Union countries, entitlement overpromising often leads to higher taxes, lower economic growth and higher rates of unemployment.

Sure, we are deep into what has been a very contentious election season, but it is time for this strategist to comment on, and maybe even rant about, what I see as a major problem that both sides of the political aisle don’t dare address. Granted, this issue is likely a longer-term problem, but some states are grappling with the early stages now. The same issue is currently affecting a number of European Union (E.U.) economies and helps explain in large part why this bloc of countries virtually always has much lower growth and much higher unemployment than the United States. But one way to look at it is that Europe is just further down the road than the U.S., but the key is America is likely on that same road.

First some background to help clarify my views. This strategist hates to owe people money—for anything. This strategist buys only cars that he can pay for in cash. This strategist has spent the last 20-plus years drilling into his kids’ heads that they need to live within their means when they get out in the real world. (One is currently out in the real world and appears to have mostly taken this advice.) In other words, when it comes to money, this strategist is a fiscal conservative. Or as my better half would say, a tightwad.

The political class, however, is not fiscally conservative. Both sides of the aisle like to spend other people’s (the taxpayers’) money. They both like to make promises to the voting public. Some would argue these promises are made with the intention of receiving votes in return. I know this is not a novel news-flash kind of statement or concept. In fact, my guess is most readers of this weekly piece think much along the same lines.

The problem is these promises are made without regard to actuarial tables or mathematical realities. The area of entitlements at the federal, state, and local levels is where these promises become a real problem. Many government entitlements were initially established when the life expectancy of the average American was around 65 years. Now, obviously, life expectancies are much higher, but the level of entitlements has remained the same or, in some cases, has even been negotiated upward. As a person who grew up in the state of Illinois, this strategist thinks he has a pretty clear understanding of what overpromising can do to a government’s ability to keep the lights on and basic government services up and running. And since no politician wants to raise taxes high enough or cut entitlement promises deep enough to make actuarial or mathematical sense, the can just keeps getting kicked down the road. At some point, a crisis almost certainly will occur.

Entitlement overpromising by politicians eventually leads to higher taxes and lower economic growth, as is the current case in most E.U. countries. Taxes are higher, of course, because the money has to come from somewhere to make good on all the promises. Higher taxes means there is less money for businesses to reinvest and consumers to spend.

Beware of political entitlement promises. Realize that at some point they do have consequences. Just look at the fiscal situation in the Land of Lincoln.

Global Investment Strategy (“GIS”) is a division of Wells Fargo Investment Institute, Inc. Wells Fargo Investment Institute is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by the GIS division of Wells Fargo Investment Institute. Opinions represent GIS’ opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

Wells Fargo Advisors is registered with the U.S. Securities Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Brokerage products and services are offered through Wells Fargo Advisors. Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company.

Special Reports

A collection of the most recent thematic reports from Wells Fargo Investment Institute that cover varying topics of interest and importance to investors.

Read Our Insights
CAR0116-04799
CEX1707