With the major stock indices all edging higher again and close to record highs, it is only natural that some investors are getting nervous, even if only on the basis of “what goes up must come down”. Nervousness, however, is an emotion and it is common knowledge that basing investment decisions on emotional responses is usually a mistake. At times like this, therefore, it pays to step back and look at data. If you do that now, especially if you include the most recently released economic numbers, it is hard to see any rational basis to sell.
The main indicators we have for the economy are the jobs market, GDP growth and data related to prices and confidence. In all those areas, the current reads are positive.
Unemployment: The jobs report for August that was released last week was more of what we have come to expect. The U.S. economy added another 201,000 jobs in August, a remarkable number nearly a decade into a recovery, and as a result the unemployment rate stayed below four percent. That is a level not seen since the 1960s, so it is by no means hyperbolic to say that we are at full employment.
Perhaps more importantly, the latest figures show significant wage increases are starting to appear as a result of the tight labor market. Hourly wages rose by 2.9% on a year on year basis last month, another post-recession record.
GDP Growth: The recent revision to the GDP number for the second quarter of 2018 showed growth of 4.2%, slightly higher than the previously reported 4.1%.
As the chart above indicates, spikes like that in growth are not unprecedented during the recovery, but after a disappointing read in Q1 the excellent number last quarter helps to maintain a steady, if not spectacular average growth rate. In fact, a strong case can be made that far from being disappointing as some claim, the lack of explosive growth is a good thing. In the past, rapid recovery has led to a “boom and bust” pattern that is absent now, which could be why this bull run in the stock market is the longest in history.
Prices and Inflation: One would think that with a tight labor market forcing wages higher and with continued growth, inflation would be a major concern by now. That is especially true when you consider the trillions of dollars added to the system by the Fed’s various programs of QE and the extended period of ultra-low interest rates that they also pursued. Core inflation has certainly picked up a bit in recent months but is still around the Fed’s two percent target rate.
The latest data on that front is encouraging too. The Consumer Price Index (CPI) increased by less than expected last month and this morning’s release of data showing a big drop in import prices may go some way towards explaining that. Whatever the reason, though, relative price stability allows the Fed to continue to normalize interest rates without slamming on the breaks which once again makes the current progress look sustainable.
Confidence: The uneasy feeling that comes with stocks around record highs, talk of interest rate hikes and the seemingly chaotic political situation have all combined to bring recent prints of consumer confidence down from the highs seen recently, but that data point remains strong. Perhaps more importantly for future growth, business confidence is at record levels and still climbing.
I am sure that for many people, recognizing economic strength now with Trump in the White House is as hard as it was a few years ago for others to see it when Obama was President. What the data show, however, is something that I have said many times. Politicians, thankfully, have nowhere near as much influence on the economy as they think. So, whether it is politics or a nervous disposition that make you reluctant to see it, the message from the numbers is clear. The U.S. economy is strong, and looks likely to remain that way for some time, and that means that stock gains can continue for some time.