Confidence is soaring…everywhere.
In last weekend’s newsletter, we showed multiple charts of surging investor confidence all at, or near, record levels. But while investors are indeed confident about the markets over the coming year, business and manufacturing surveys (sentiment) have also surged to near record levels. The National Federation Of Independent Businesses (NFIB) just released their December survey which showed a near record level of confidence for business owners.
One thing to notice is that spikes in optimism have generally occurred near peaks in the market.
Why should that be the case?
The reason is simple, exuberance tends to be disappointed by reality. When you dig down into the NFIB survey what small business owners are “saying,” and “doing,” are two different things.
For example, while business owners “SAY” they are optimistic about the economy currently, when it comes to committing their capital they are not nearly as brash. In fact, their level of planned capital expenditures continues to run at levels more normally associated with weak, or recessionary, environments.
What about consumers? They are optimistic as well.
Well, maybe not as much as you think. The survey shows that while business owners “SAY” sales should be improving, their biggest concern, which is spiking higher, is “poor sales.”
Furthermore, notice that while there has been an immense amount of “chatter” about how the recent tax reform has lowered the burden on business which will lead to a surge in economic growth, etc., the level of concern over the amount of taxes being paid has budged from post-recessionary levels. While taxes were recently lowered, the “cost” of labor is rising which will absorb, for small business owners, much of the impact of any tax cut received.
There is also a big difference between what the “hope” sales will be and what “actually” occurs. With such high levels of expectations currently, the risk of disappointment in future sales volumes is elevated.
While there is much “hope” that economic growth will boom this coming year due to regulatory and tax changes, history suggests the current levels of “economic optimism” are also likely to be disappointed.
Ultimately, for the markets and for investors, it is what you DO that matters the most.
Investors are currently set up for disappointment on many fronts over the next 12-24 months. While “exuberance” currently reigns, and investors are piling into risk equity with reckless abandon, the markets will continue to push higher.
Just be aware that “reality” will eventually set in.
Here is your weekend reading list.
RIA Chart Book: Q4-2017 Most Important Charts
Research / Interesting Reads
“Risk comes from not knowing what you are doing.” – Warren Buffett
Questions, comments, suggestions – please email me.