What does a record gap between ‘soft’ and ‘hard’ data tell us?

What does a record gap between soft and hard data tell us

Written by James Weir

James specialises in the theory and best practice of portfolio construction and management. His success within national and international investment banks led him to become a Co-Founder of Steward Wealth and he is a regular columnist for the Australian Financial Review.
April 17, 2017

Soon after Donald Trump’s election win it appeared the animal spirits of small businesses in the U.S. had been awakened by the prospect of tax cuts and a reduction of government regulations. One survey of small business optimism saw its biggest monthly jump in about 35 years immediately after the election – see the chart below.

What does a record gap between soft and hard data tells us_chart1

And consumer confidence recently hit a 16 year high – see the chart below.


University of Michigan Consumer Confidence survey
What does a record gap between soft and hard data tells us_chart2

Share markets seemed to respond as well, with the S&P500 hitting record highs, apparently anticipating the lift in economic activity that a boom in business spending would bring.

The problem is we’ve yet to see the lift in confidence translate into a lift in economic activity. In fact, Morgan Stanley has pointed out the gap between what’s called ‘soft data’, things like confidence surveys, and ‘hard data’, things like capital expenditure and increased production, has never been bigger – see the chart below.


The gap between ‘soft’ data and ‘hard’ data had never been bigger
What does a record gap between soft and hard data tells us_chart3
Source: Morgan Stanley

It’s difficult if not impossible to tell from that chart whether we can expect a rise in the hard data, but it could swing two ways: either the hard data picks up and confirms the share market’s enthusiasm, or the spike in the soft data turns out to be a knee jerk reaction to the hype around Trump’s very ambitious promises. Given the problems Trump has encountered in trying to enact his agenda to date, concerns are rising that confidence will deteriorate and take the animal spirits with it.

In terms of how we deal with that in the portfolio, we have said many times that trying to time jumping in and out of markets on concerns that could just as easily go either way is very risky. Rather, we will continue to watch carefully for signs of structural weakness.

This information is of a general nature only and nothing on this site should be taken as personal financial or investment advice, or a recommendation to buy or sell a particular product. You should also obtain a copy of and consider the Product Disclosure Statement before making any decision on a financial product. You should seek advice from Steward Wealth who can consider if the general advice is right for you.

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