Why is Investor Confidence Lagging?

Transcription

1 Veronica Willis Investment Strategy Analyst WEEKLY GUIDANCE ON ECONOMIC AND GEOPOLITICAL EVENTS Why is Investor Confidence Lagging? July 3, 2018 Key takeaways» Typically, late in the economic cycle, we see consumer, investor, and business sentiment becoming increasingly positive. Yet, in this cycle, investor confidence has continued to lag consumer and business confidence.» Investor confidence may be affected by growing uncertainties surrounding economic growth, political risks, trade and monetary policy changes, and the rise in market volatility this year. What it may mean for investors» Despite some weakness in investor confidence recently, we do not believe that we are at the end of the cycle yet. We expect economic growth to continue in the U.S. and overseas and rates to continue rising gradually. We currently favor equities over bonds in a diversified portfolio, and short-term fixed income over longer-term bonds. Sentiment indicators, such as investor confidence, consumer confidence, and business optimism tend to climb later in the economic cycle (where we estimate the U.S. economy is currently). In past cycles, investor confidence rose even as market volatility began to increase. As previous economic cycles transitioned into recession, complacent investors were taken by surprise when market downturns proved to be more than temporary. The current U.S. economic cycle does not appear destined for a recession in the near term; however, we estimate that the cycle is in its final third. Yet, institutional and individual investor confidence has been unable to mount a sustained recovery after a decline in 2015 stemming from the beginning of Federal Reserve (Fed) monetary tightening and fears of a Chinese economic downturn. In a previous report 1, we discussed this divergence of investor confidence and consumer sentiment. At that time, investor confidence seemed poised to improve as investors were becoming more confident in the future economic outlook. However, renewed concerns surrounding economic growth, along with trade and monetary policy uncertainties, may be suppressing investor confidence. As Chart 1 shows, institutional investor confidence started to improve beginning in 2016, but it has weakened as trade and monetary policy concerns have intensified. Confidence currently sits near 2011 levels (when investors were wrestling with the implications of the Greek debt crisis and the future of the euro). 1 Global Perspectives, What Are Consumer and Investor Confidence Signaling? September 19, Wells Fargo Investment Institute. All rights reserved. Page 1 of 7

2 Chart 1. Institutional investor confidence falters 1 Index level Investor confidence is near mid-2011 levels Investor confidence recently has dipped lower 40 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 State Street Investor Confidence Index Sources: Bloomberg, State Street, June 29, Institutional investors are not the only ones with sagging confidence. The American Association of Individual Investors (AAII) Index for bullish readings has yet to reach the highs set during the past two U.S. economic expansions (Chart 2). Unlike the State Street Institutional Investor Index that monitors the amount of risky assets held in institutional portfolios, the AAII surveys investors on their outlook for the stock market over the next six months. Chart 2. Individual investor confidence is below previous cycle highs Bullish sentiment has not approached the highs during the last expansion Percent AAII U.S. Investor Sentiment Bullish Readings (3 month moving average) Sources: American Association of Individual Investors, Bloomberg, June 29, While both institutional and individual investor confidence have shown some weakness lately, other sentiment measures (such as the business optimism and consumer confidence measures shown in Chart 3) have continued to rise through this expansion Wells Fargo Investment Institute. All rights reserved. Page 2 of 7

3 Investor confidence has diverged from these other sentiment measures. Global growth that has lagged previous recoveries could be one reason, but investors also may be cautious in light of rising interest rates and wary that the aging bull market in U.S. equities will come to an end at some point. Chart 3. U.S. business and consumer sentiment measures continue to climb Index level (Indexed to 100 as of 1/31/1978) '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Sources: Bloomberg, National Federation of Independent Business (NFIB), University of Michigan, June 29, How does this compare to the past? NFIB Small Business Optimism Index University of Michigan Consumer Sentiment Index U.S. institutional investor confidence historically has tracked very closely with consumer confidence (Chart 4, top panel) but has not been trending upward with consumer confidence over the past couple of years. There have been other periods of time in which investor confidence has diverged from consumer confidence. One such example was in , when the combination of geopolitical concerns, soft global economic data, and concerns regarding a weakening dollar coincided with the beginning of a Fed rate hike cycle. Investor confidence eventually realigned with consumer confidence in the second half of the economic cycle, increasing until shortly before the Great Recession. That period of divergence was shorter-lived than the current divergence, but was driven by similar forces uncertainty surrounding global growth and tighter monetary policy Wells Fargo Investment Institute. All rights reserved. Page 3 of 7

4 Chart 4. Consumer confidence is outpacing investor confidence Index level (Indexed to 100 as of 7/31/1998) Spread between consumer and investor sentiment '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 University of Michigan Consumer Sentiment Index State Street Investor Confidence Index Investor confidence outpaces consumer confidence -30 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Periods of Fed rate hikes Sources: Bloomberg, State Street, University of Michigan, June 29, Consumer confidence outpaces investor confidence University of Michigan Consumer Sentiment Index - State Street Investor Confidence Chart 4 (in the bottom panel) also depicts the spread between consumer confidence and investor confidence. Consumer confidence tends to outpace investor confidence during periods of rising interest rates (before investor confidence eventually increases to a level that is more in line with consumer confidence). The initial decline in investor confidence during this cycle appears to have been driven by the start of Fed monetary tightening and concerns regarding a slowdown in Chinese economic growth in Since then, investors have indicated that, in their view, future economic prospects are not as strong as present conditions are. Intensifying political and policy risks in the U.S. and abroad, along with concern that global monetary policy will tighten too quickly and stall economic growth, likely have left investors unsure about the prospects for future economic growth. Investor confidence also was struck by the sharp increase in market volatility this year from the very low levels seen previously Wells Fargo Investment Institute. All rights reserved. Page 4 of 7

5 Investment implications We expect investor confidence to converge more closely with consumer attitudes over the balance of the economic cycle. Despite the uncertainties mentioned above, households have remained willing to increase their spending. This is a potential bright spot for future corporate earnings and one potential catalyst for higher U.S. equity prices by year-end. Investors likely are uncertain about the impact of tighter monetary policy globally. The Fed has been raising interest rates and reducing its balance sheet, and the European Central Bank (ECB) is expected to end its asset-purchase program this year and begin raising rates before the end of While monetary policy is turning less positive for equities, interest-rate increases in the U.S. have been gradual and from low levels (and we expect this to continue). The ECB has also communicated a very gradual end to stimulative policy. With interest rates rising at such a gradual rate, and from such low levels, we continue to favor equities over bonds in diversified portfolios at this point. Within fixed income, we favor shorter-term issues over longer-term bonds as central bank rate increases have raised short-term yields to more attractive levels, while longer-term issues have a more challenging risk/reward profile in a rising-rate environment. While greater transparency surrounding political and policy issues could put investors more at ease going forward, political risks are likely to be unpredictable and persist. Therefore, we believe investors should continue to follow their long-term investment plan during times of political uncertainty and focus on the underlying factors that traditionally drive economic growth, such as a strong labor market, healthy household spending and borrowing, and a pickup in business investment Wells Fargo Investment Institute. All rights reserved. Page 5 of 7

6 Economic Calendar Date Report Estimate Previous 7/2/2018 Markit US Manufacturing PMI /2/2018 Construction Spending MoM 0.50% 1.80% 7/2/2018 ISM Manufacturing /2/2018 ISM Employment /2/2018 ISM Prices Paid /2/2018 ISM New Orders /2/2018 Revisions: Construction Spending 7/3/2018 Factory Orders 0.00% -0.80% 7/3/2018 Factory Orders Ex Trans % 7/3/2018 Durable Goods Orders % 7/3/2018 Durables Ex Transportation % 7/3/2018 Cap Goods Orders Nondef Ex Air % 7/3/2018 Cap Goods Ship Nondef Ex Air % 7/3/2018 Wards Total Vehicle Sales 17.00m 16.81m 7/4/2018 MBA Mortgage Applications % 7/5/2018 Challenger Job Cuts YoY % 7/5/2018 ADP Employment Change 190k 178k 7/5/2018 Initial Jobless Claims 225k 227k 7/5/2018 Continuing Claims 1720k 1705k 7/5/2018 Bloomberg Consumer Comfort /5/2018 Markit US Services PMI /5/2018 Markit US Composite PMI /5/2018 ISM Non-Manf. Composite /5/2018 FOMC Meeting Minutes /6/2018 Trade Balance -$43.9b -$46.2b 7/6/2018 Change in Nonfarm Payrolls 200k 223k 7/6/2018 Two-Month Payroll Net Revision -- 15k 7/6/2018 Change in Private Payrolls 190k 218k 7/6/2018 Change in Manufact. Payrolls 13k 18k 7/6/2018 Unemployment Rate 3.80% 3.80% 7/6/2018 Underemployment Rate -- 7.% 7/6/2018 Average Hourly Earnings MoM 0.30% 0.30% 7/6/2018 Average Hourly Earnings YoY 2.80% 2.70% 7/6/2018 Average Weekly Hours All /6/2018 Labor Force Participation Rate % 7/9/2018 Consumer Credit -- $9.262b 7/10/2018 NFIB Small Business Optimism /10/2018 JOLTS Job Openings Source: Bloomberg, as of June 29, Wells Fargo Investment Institute. All rights reserved. Page 6 of 7

7 Risk Considerations Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Definitions An index is unmanaged and not available for direct investment. The AAII Investor Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market short term; individuals are polled from the AAII Web site on a weekly basis. The Small Business Optimism Index is a composite of ten Small Business Economic Trends (SBET) indicators that provides a monthly, summary data point for the state of the small business economy. The State Street Investor Confidence Index measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors. The index assigns a precise meaning to changes in investor risk appetite: the greater the percentage allocation to equities, the higher risk appetite or confidence. The University of Michigan Consumer Sentiment Index is a monthly survey of U.S. consumer confidence levels conducted by the University of Michigan. It is based on telephone surveys that gather information on consumer expectations regarding the overall economy. General Disclosures Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. The information in this report was prepared by Global Investment Strategy. Opinions represent GIS opinion as of the date of this report and are for general information 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. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. 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 and 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. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. CAR Wells Fargo Investment Institute. All rights reserved. Page 7 of 7