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Posted on JAN 17, 2017

Johnson Bank Wealth Weekly Investment Commentary | Tuesday, January 17

This is part of an ongoing series of Weekly Commentary articles published by Johnson Financial Group.
This week's issue is written by Brian Andrew, SVP, Chief Investment Officer.

Consumer Enthusiasm

As we settle into the rhythm of a new year, we can return to some of the details that will likely drive asset prices this year: economic and corporate fundamentals. As we move toward the inauguration this Friday, the new fiscal policy, including taxes, health care, regulation and spending, will dominate headlines. Keeping an eye on the fundamentals can provide some insight into whether or not the new policies are creating the economic boost that is expected.

Consumer Confidence

Last week, we received some good news about both consumer confidence and retail sales. This information confirmed the fact that consumers are feeling better than they have in a while and are willing to take action with their new‐found enthusiasm.

On Friday, we received an update to the University of Michigan Consumer Sentiment survey. It was 6.6% higher than the year before. In particular, consumers were optimistic about future expectations. Even though the index declined slightly from the prior month, it remains near its high. The current conditions measured in the index remain near the highest they have been since 2004.

These optimistic feelings are not uniformly shared, however. The difference between those who believe that government policy will be positive and those who have a negative view has reached a wider level than ever seen, representing the partisan view of future fiscal policy. This is important because the consumer represents two thirds of the economy, and the increase in the sentiment survey suggests that spending will continue to grow at a reasonable rate. The partisan spread in expectations confidence could reduce that overall consumption. It is possible that as the new fiscal policies become clearer, this could abate.

Retail Sales

We also received an update regarding retail sales. On the surface, it was a strong report. Sales increased .6% over the month of November. Over the last year, sales grew by 4.1%, the highest annual growth rate in the last twelve months (except for October, which was only a tenth higher). Much of the monthly gain can be attributed to strong auto sales. There was a 2.4% gain in auto sales over the month of November. For the year, light vehicle sales were 18.3 million units—an 11‐year high! Strong auto sales are a reflection of consumer sentiment because in order to purchase a big‐ticket item like a car, consumers need the confidence of future strong labor markets and wage growth.

The increase in gas prices also lifted gas and convenience store sales by 2% over the prior month.

These strong numbers are in conflict with other retail sales as a result of the move from in‐store to on‐line sales. Department store sales were actually down by .6%, while non‐store retailers enjoyed a 1.3% gain over the prior month. During the last month, large retailers such as Kohl's and Macy's have announced a reduction in stores and staffing while Amazon reported another record year for holiday sales.

As mentioned earlier, personal consumption and consumers are responsible for two thirds of the economy. As a result, their views of the future for economic, wage and labor market growth are key to determining whether or not the economy will outperform in 2017.

Fiscal Policy

One of the focal points of the new administration and Congress' policies is tax reform and reducing the individual tax rate, so information regarding these policies could create enthusiasm among consumers even before the policies are implemented. We will continue to track consumer confidence and retail sales as two indicators of how consumers are feeling about the potential for new fiscal policy.

Because this new policy comes at a time when the unemployment rate is low and wage growth is rising, it is possible that consumer sentiment and consumption could continue to rise even more.

Brian Andrew
As Chief Investment Officer, Brian Andrew leads Johnson Financial Group's investment strategy
to provide consistent, actionable investment solutions for our clients.

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This information is for educational and illustrative purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation, an offer to buy or a recommendation for any security. Opinions expressed herein are as of the date of this report and do not necessarily represent the views of Johnson Financial Group and/or its affiliates. Johnson Financial Group and/or its affiliates may issue reports or have opinions that are inconsistent with this report. Johnson Financial Group and/or its affiliates do not warrant the accuracy or completeness of information contained herein. Such information is subject to change without notice and is not intended to influence your investment decisions. Johnson Financial Group and/or its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Certain investments, like real estate, equity investments and fixed income securities, carry a certain degree of risk and may not be suitable for all investors. An investor could lose all or a substantial amount of his or her investment. Johnson Financial Group is the parent company of Johnson Bank, Cleary Gull Advisors Inc. and Johnson Insurance Services LLC. NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE

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