Most of our accounts with whom I’ve met in recent months are disturbed, if not horrified, by the prospect of either one of the presidential candidates in the White House come January 20, 2017.
So why are stocks at a record high?
Could it be that the economy is in better shape than suggested by Donald Trump?
I think so.
Could it be that investors are impressed by how well it has done despite Washington’s meddlers, and might continue to do so no matter who is in the White House? For now, even the awful terrorist attacks at home and overseas aren’t upsetting investors. Nor are all the significant geopolitical disturbances, including the civil war in Syria, massive migrant flows to Europe from the Middle East and Africa, Russia’s attempts to rebuild its empire, and tensions in the South China Seas.
The market is at a record high because investors are accentuating the positives. Of course, ultra-easy monetary policies provided by the Fed and other central banks have greatly benefited stocks, pushing up valuation multiples. In addition, the US economy is doing well, and the outlook for earnings is improving after deteriorating in recent quarters.
Let’s review some of the happy stuff that runs counter to Trump’s dark view:
(1) US consumers are spending and buying houses. The Atlanta Fed’s GDPNow
model, last updated on July 19, suggests that real personal consumption expenditures expanded in Q2 by an annualized 4.5%. That’s a pace of growth not seen since the first quarter of 2006 (Fig. 1).
Existing home sales increased 1.1% during June to 5.57 million (saar), the highest since February 2007 (Fig. 2).
The share of first-time buyers hit 33% in June, its highest level since July 2012. While rising home prices have kept some new buyers out of the market, record-low mortgage rates may be bringing them back.
The rate for a 30-year, fixed-rate mortgage was 3.52% on Friday, down from 4.04% a year ago (Fig. 3).
In mid-July, the mortgage refinancing index jumped 123% since the start of the year to the highest readings since mid-June 2013 (Fig. 4).
(2) Consumers are happy for now, but uneasy about the future. The strength in consumer spending reflects the underlying uptrend in the current conditions component of the Consumer Confidence Index (CCI) (Fig. 5).
It has been on a cyclical uptrend since the end of 2009, and in recent months through June has been the highest since September 2007. On the other hand, the expectations component of the CCI has been in a slight downtrend since January 2015.
As for the here and now, the current conditions CCI reflects that the employment-to-population ratio has been improving and real wages are rising, up 1.3% y/y during May to another record high (Fig. 6
and Fig. 7
By the way, while the overall CCI has stalled since January 2015, it is up sharply for people in the under-35 age group (Fig. 8).
That’s a good sign for the economy since young adults tend to be the ones forming new households; they tend to dominate the pool of first-time homebuyers. So it is good to see them showing greater optimism.
(3) Misery Index remains at cyclical low. Interestingly, the peaks in the ratio of the current conditions CCI to the expectations CCI have coincided with the start of recessions and bear markets in stocks (Fig. 9
and Fig. 10
). There’s no evidence that this ratio has peaked yet, confirming that the economy is still growing and the bull market in equities remains intact.
Helping to buoy consumer confidence is the Misery Index, which is the sum of the unemployment rate and the yearly percent change in the CPI. It tends to fall during economic expansions and bull markets in stocks and to rise during recessions and bear markets. It is currently at a cyclical low, near previous ones (Fig. 11
(4) Real household income at record high, really! Trump’s assertion that household incomes are down $4,000 since 2000 must be based on the Census Bureau’s measure of real median household income, which is actually down $4,186 through 2014, the latest available data (Fig. 12)
For now, let us note that on an annualized and a per-household basis, real personal income, real disposable income, and real personal consumption are up since the start of 2000 through March by $23,600 (24%), $22,100 (26%), and $18,500 (24%), all to record highs!
Admittedly, these data are all means rather than medians, but we doubt that using medians (which are not available for these series) would change the results significantly: There simply aren’t enough rich people, who are getting richer, to skew these numbers very dramatically to the upside. If there were, then why was the Census Bureau’s measure of real mean household income down $2,100 since 2000 through 2014, falling along with the median version of this series?
Dr. Ed Yardeni
is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.
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