Since getting together, this Congress has been more “on-again, off-again” than high-school sweethearts—and while the world watched its most recent fight with bated breath, an array of positive economic data largely went unnoticed. Concerns how a potential (though highly improbable) US default could have impacted domestic and foreign economies flooded the media leading up to Congress’s agreement, hiding positive fundamentals worldwide. Once again, the world’s skepticism—again driven by hyper-fixation on government ineptitude—is preventing most folks from noticing a bright reality. Ongoing, little-appreciated growth is a big reason why global markets have shrugged off political parlor games—and a big reason this bull likely runs on.
Just after the US government partially closed, the Institute for Supply Management (ISM) released its September US manufacturing gauge, which was solidly expansionary again, thanks to growing inventories, order backlogs, production and employment. Now, growing inventories aren’t always positive, but consumer spending’s continued strength suggests firms are building inventories to keep up with demand. Backlogged orders, meanwhile, mean they’re struggling to do so—new business is coming in faster than firms can handle! Rising consumer credit supports continued strength, too—more credit demand suggests more spending. And September non-manufacturing continued expanding, though at a slightly slower pace. Importantly, both indexes’ forward-looking new orders components were even stronger than current output statistics, implying continued economic growth, if not acceleration, ahead.
Overseas, UK August trade increased (exports +0.4% m/m and imports +0.1% m/m), as did employment—the UK economy added 155,000 new jobs from May – August. September UK retail sales were also up (+0.6% m/m) on non-food and non-store retail, hitting a five-year high. Plus, UK advertising spending grew at its fastest rate in 13 years in Q3—firms don’t splash cash on advertising unless they’re profitable enough to afford it.
The eurozone recovery continued, too! Retail sales improved in August, beating expectations. August industrial production (IP) outperformed (+1.0% m/m)—with high German IP offsetting weakness elsewhere. And September PMIs showed expansion almost across the board.
You may have noticed these data are backward looking—most economic data are. But they still illustrate the kind of positive fundamentals supporting this bull market. With global growth accelerating, there are likely plenty more positive results where these came from.
But investors seem stuck in the doldrums. For example, on Wednesday, Congress brokered a deal many feared wouldn’t come, but sighs of relief were few and far between. Instead folks bemoaned the deal’s being only a temporary fix. Yep, folks are already eyeing the next round of budget and debt ceiling wrangling on tap for the New Year. Some even fear Congress’s can-kicking will be a recurring issue moving forward—apparently forgetting can-kicking has been Congress’s favorite pastime since … always.
Others worry the US’s economic powerhouse reputation has been materially damaged (though Treasury yields would tell another story), as if this round of budget bickering is somehow different than the near constant flow of politicized hot air hovering over DC—or the shutdown different than the 17 others since 1976. Still others cite concerns over the hypothetical amounts of wealth lost during the shutdown (an unquantifiable, arbitrary figure) and how difficult restarting the government will be—seemingly ignoring furloughed workers will soon receive back pay. Then, fears still run rampant about a possible US downgrade from too much political gridlock—a rerun from 2011 that ended in falling Treasury yields and more bull market (albeit with a correction—volatility influenced in no small part by the then-escalating eurozone crisis).
Understandably, facing so many (if unwarranted) worries can make investors more fearful than strong economic reality suggests they should be—bullish, in our view. As investors busy themselves with overwrought fears, markets should quietly continue rising. Eventually folks catch on to continued growth and corporate profitability, and seeing reality is much better than expected boosts confidence—along with the amount they’re willing to pay for firms’ future earnings, lifting stocks.
Switching from skepticism to optimism is a slow process. And an uneven one. Today’s skepticism is deeply rooted in and exacerbated by negative media—they know what sells. To a degree, this keeps investors from euphorically chasing stock performance, but it likely also governs when the switch from skepticism to optimism occurs—for now, given how dour the headlines are, it seems a ways off, suggesting this bull has plenty of room to run.