Treasuries are wrapping up with their first weekly gain since the U.S. election and stocks are mixed in pre-holiday trading. Yields on the 10-Year Treasury benchmark closed at 2.54 percent, down from last week’s close of 2.59 percent. The S&P 500 and Dow Jones Industrial Index are trading at slightly higher levels than where they started on Monday. Economic news was somewhat mixed. Gross domestic product numbers were released on Tuesday and came in at 3.5 percent, which was a little higher than expected. Durable goods orders and shipments for November came in a little weaker than expected, perhaps reflecting the struggles the manufacturing sector will continue to have with a stronger U.S. dollar and higher interest rates.
With this quieting-down of the markets for the holidays, we were reflecting the increased usage of the term “animal spirits” both by our Investment Team and by Wall Street in general and thought that the term would be a timely topic of interest.
The term was first introduced by the famous economist, John Maynard Keynes. In his 1936 book, "The General Theory of Employment, Interest and Money", he wrote:
“Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”
Or perhaps Google captures it more succinctly than the Cambridge professor by defining it simply as “natural exuberance.”
With the results of the election on November 8, this exuberance, or “animal spirits”, has manifested itself in the stock market and barometers of optimism: consumer confidence and business confidence. The economy, both domestically and globally, has only very marginally improved in the last month or so, yet stocks and the various measures of confidence have taken a significant leg up. “Animal spirits” have risen.
Such confidence can lead to a stronger market tone and lead the way for behaviors that will truly drive economic growth, such as a manufacturer deciding to add to their production line, a consumer deciding to remodel their home, or an employer deciding to increase personnel. For economic growth to truly take a step up, higher confidence will need to be sustained. In the next year, “animal spirits” may be enhanced or diminished depending on the outcomes of fiscal policy, taxes, regulations and trade policy.
Our Takeaways for the Week
- Both bond and stock markets were slightly up for the week after mixed economic news
Although relieved the heightened emotions from the election have quieted, we are cautiously optimistic about businesses and consumers driving more economic growth