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The Dilemma Between Feelings and Actions

By Rayna Penelova

Have you heard of the terms soft and hard data? Soft data generally refers to metrics that measure sentiment and beliefs, while hard data is focused on actual improvements in the economy, such as wage gains and employment growth.  In that sense, soft data is really about how people and businesses feel, while hard data is about how they act. Usually these two types of indicators go hand in hand as people and businesses end up spending more when they feel optimistic about the future. However, in the aftermath of the U.S. presidential election the two have diverged significantly.

“Feel” indicators such as consumer confidence and small business optimism have surged post-election. Consumer confidence is at levels unseen since the end of 2000 and small business optimism has not been this rosy since 2004. The surge is mainly attributable to the belief that the new administration will deliver on its promise of substantial tax cuts, infrastructure spending, and regulation roll-backs.

While it is still early, “Act” indicators, such as real consumer spending and business investment have not followed suit and exploded to the upside. In fact, first quarter GDP is expected to be underwhelming at 1%.  This begs the question: Why aren’t people putting their money where their mouth is?

Uncertainty maybe to blame with the small business uncertainty index sitting near all-time highs. The health care blunder did not help and now the prospects of tax reform look even more challenged. Party polarization and government gridlock is deep and getting deeper. In all likelihood, any tax plan that gets through Congress and the White House will not live up to original plans.

Infrastructure spending has also fueled optimism. There is a one trillion-dollar proposal on the table, but it lacks details and clear sources of capital, which lead to further uncertainty.  On the regulatory front, President Trump has taken initiative and signed executive orders rolling back some regulations. However, it is hard to predict the effects of changes in the regulatory environment and it will take time for those changes to be reflected in corporate earnings.

Uncertainty is like kryptonite for investment and, as a result, businesses seem to be taking a “wait and see approach.” The longer they wait and fail to act on their optimism, the higher the possibility that their optimism fades.

The reason such a development is significant is that “Feel” indicators have moved in-line with the stock market.  As such, a correction in the “Feel” indicators is likely to be accompanied by a correction in the stock market.

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