The Great Divide on Stocks and the Economy

Deep disagreements on America’s outlook could mean one thing for the stock market, another for the economy

By Justin Lahart

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 near all-time highs, investors seem indivisibly bullish on where the economy is heading. Part of the reason for that might be that investors skew more Republican than the average American. Another might be that, when there are deep disagreements in the stock market, bearish investors often retreat rather than fight. Betting against stocks is more difficult and costly than betting on them. That can leave the bulls, and traders angling to ride their optimism, in charge of the market.

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 to help cushion the blows of a bad economy—something true of younger Americans as well.

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.

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