“It’s the Economy, Stupid”
by Jim McElroy, email@example.com
A quote from a past presidential campaign provides an answer to bull market deniers who question the validity of the current market’s optimism. That’s not to say that the skeptics don’t have their point: this past quarter has provided enough troubling news to satisfy the most pessimistic doomsday prophets. The litany of ills reads like a biblical description of the end of days: hurricanes, floods, rolling balls of fire ants, violent mobs attacking statues and each other, governments too dysfunctional to confront looming crises and world rulers threatening nuclear Armageddon. Nevertheless, the world economy and its markets have chosen to ignore these troubling signs — some might say bury their heads — and to focus instead on the positive signs appearing in financial statistics. History is full of prophesies of doom that never materialize and economic booms that thrive against backdrops of fear and existential angst: the era of the Cold War, which from 1950 to 1989 held the world in constant fear of nuclear annihilation, was witness to unprecedented economic growth and multiple bull markets. Although the first correct prophecy of the end of the world will have a profound effect on the economy and markets, until that happens or until the financial news turns negative, we can expect a continued disconnect between what is reported on the front page and what is reported in the financial section.
And the reports from the financial pages remain significantly promising. U.S. GDP for the second quarter of 2017 registered 3.1%, the highest rate since the first quarter of 2015. Although GDP has probably taken a hit in the third quarter due to disruptions from hurricanes in Houston and Florida, these negatives will likely reverse in the fourth quarter as infrastructure and home rebuilding moves into full swing. And although it’s not included directly in the calculation of U.S. GDP, the hurricane that devastated Puerto Rico will generate similar negative and then positive results. It is, after all, an ill wind that blows no good. The unemployment rate has likely hit bottom at near 4% — probably a full employment level — while gains in employment continue at a strong or at least moderate pace of between 150,000 to 200,000 a month. Consumer confidence remains robust due to low unemployment and increasing home and stock prices. Corporate profit growth, which finally began appearing after the third quarter of 2016, continues to show progress. As a result of improving profitability, capital expenditures (key to productivity growth, low inflation and increasing real standards of living) have also returned to an upward slope after a slowdown in the 2014-2016 periods. All in all, the economic data describes an economy that is somewhere near the halfway point in its cycle. And the element of the economy, which for the last fifty years has marked the beginning of the end of almost every economic cycle, inflation, is virtually nonexistent.
Click here to read more.