Investor optimism is at a 9-year-high, according to the Wells Fargo/Gallup Investor and Retirement Optimism Index, but that doesn’t mean investors should take all of the money they’ve had sitting out of the stock market and go all in immediately.
Scott Wren, senior global equity strategist for Wells Fargo Investment Institute, says that the past economic cycle has not been a typical cycle.
“When you see the stock market move up as much as it has over the last seven years and when you see the unemployment rate drop basically in half over the course of that time or a little bit shorter, normally it would have been a long time ago that you would have seen more optimistic consumers and investors, but it has taken a while to really gain some traction in this particular cycle,” Wren says. “People, investors have been very cautious.”
Wren says that Wells Fargo clients have had a lot of money on the sidelines that they optimally would like to have in the market but have been pretty nervous. Past surveys have shown that investors have been concerned about another economic downturn.
And while confidence has been slowly building, not just with investors but with consumers and businesses as well, it has taken a while to take hold.
“Since the election and in the survey we did, there’s been a pretty good jump from one quarter to the next in terms of a more positive outlook, not just for the stock market, but the economy and incomes and those sorts of things,” he says. “Normally, you would have gotten to these levels three years ago in a normal cycle. Then again, a normal cycle has seen better economic growth and wage increases far greater than what we have seen. Those kinds of things have been headwinds in terms of investor confidence and sentiment.”
The Wells Fargo/Gallup Investor and Retirement Optimism Index jumped from +79 in the third quarter to +96. Among retired investors, the optimism index improved 36 points to +117. For non-retired investors, that number increased 11 points to +89. The survey took place Nov. 16-20.
Even though the numbers have risen, they are nowhere near their March 2000 high of +178, Wren says. The low was +64 in February 2009, just after the recession hit.
That’s a good sign, Wren says, because it means that “we are far from extreme.”
“Most stock market cycles, before they reach an end, you have a lot of exuberance, a lot of excitement, a lot of confidence in the economy and markets,” he says. “People want to buy stocks. They don’t want to miss the next move up. They are chasing stocks, jumping in with both feet. We are far from those kinds of levels.”
He adds that even though the optimism index made a good jump, “it’s not to a level that would be worrisome to people.”
Wren says he is not expecting much net movement in 2017. “We are expecting more of a flat sort of year.”
The election of Donald Trump to the presidency helped boost the optimism index, with many people believing he will be good for business, the economy and stagnant wages.
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Forty-six percent of respondents said the outcome of the election makes them feel more optimistic about the U.S. economy over the next 12 months, surpassing the 38% who say it makes them feel less optimistic.
Thirty-seven percent of investors believe the election results will impact their net worth, with 42% or retirees and 35% of non-retirees believing it will have a major impact. An additional 42% of investors say it will have a minor impact on their net worth.
“The goal of the new administration needs to be prolonging this economic expansion, which has been very long in the tooth. The average expansion over the past 80 years is 4.5 years. We’re going to enter the eighth year of expansion here. What the new administration needs to do, in my opinion, is continue pushing the economy forward,” he says. “It would be nice to pick up speed in terms of economic growth, but basically implement policies that are going to be pro-growth. They are going to allow the economy to continue to grow and pick up speed over the course of the next couple of years relative to what we’ve seen.”
Retirement investors need to keep doing what they are doing, he suggests. They shouldn’t make any sudden moves. Wren recommends that investors put about one-third of their sidelined money into the stock market but hold the rest back to see what comes next. It will take patience for some of these things to change around. Next year is already on course. There isn’t much that can derail policies that are already in place. Real changes, stemming from a new administration, will likely start being felt in 2018 or 2019, he says.
The Wells Fargo/Gallup survey also found that 57% of respondents believe their wages or compensation will increase. That’s also good news because it means that people will do a little more discretionary spending than they would normally do, which boosts the consumer-driven economy in the U.S.
Wages did go up during the second half of 2016.
“The statistics show that is not rising a lot, but consumer spending is a good driver of the economy,” he says. “Much is based on the perception that wages will continue to increase and that they increased a little bit in 2016.”
