The Great Divide on Stocks and the Economy



Americans’ divisions over the policies of President Donald Trump may not be weighing on stocks, but the economy could be another matter.

Mr. Trump is completing his first 100 days in office with the lowest job-approval rating for a new president in the history of Wall Street Journal/NBC News polling. Even so, he continues to receive high ratings from his fellow Republicans. It is a phenomenon that extends into people’s assessment of the economy. The University of Michigan’s ongoing survey of consumers shows that Americans’ outlook has improved since the election, but that has been largely driven by Republican optimism. Democrats are deeply pessimistic about where the economy is headed.

But with stock indexes dancing at or near all-time highs, investors seem indivisibly bullish on where the economy is heading.

When it comes to consumer spending, however, there may be a different dynamic at work. First, the spending of the on-average poorer and younger people who identify as Democrats may be more responsive to shifts in confidence than Republicans. Economists at the Federal Reserve Bank of Chicago, for example, have found that drops in sentiment appear to affect  poorer households’ spending more than richer households’ spending.

Presumably, that is because the poor hold fewer assets.

But even if the roles were reversed, the pessimists might exert more of an influence than the optimists. Because worries about future financial losses tend to motivate people more than hopes for future gains, the pessimists have more of an incentive to step up precautionary saving than the optimists do to step up spending.

If so, the overall rise in confidence measures may be illusory with the division between economics optimists and pessimists amounting to no more than a wash. Bullish investors could one day wake up to realize that stock market valuations have left the economy behind.


Source: The Wall Street Journal

Junior Trader Stefan Panteleev

 Varchev Traders

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