Published on December 5, 2019 in the Rochester Business Journal

The world is a chaotic place, with numerous geopolitical, economic and business conditions suggesting that financial markets are due for a pause. In spite of this, the Dow Jones Industrial Average, the Nasdaq Composite Index and the S&P 500 Index have all gone on to set new all-time highs in 2019. To boot, cyclical stocks have been rallying and perceived safe-haven investments like Treasury bonds and defensive stocks have been selling off. Fear has been supplanted by greed, or optimism at the very least, and the market’s faith in the global economy appears to be unbroken.

On the geopolitical front, we need not look any further than the current impeachment trial against President Trump as a cause for market angst and concern. Ongoing trade negotiations with China are also worrisome, mainly because of the adverse consequences that a failure to reach some sort of timely agreement would have on the U.S. economy and others. Violent, pro-democracy protests in Hong Kong, an ever-unpredictable North Korea and continued unrest in the Middle East also seem to be problems in the making. With respect to the latter, Benjamin Netanyahu’s recent indictment on bribery and fraud charges in Israel, the U.S.’s relaxed stance on additional Israeli settlements in the West Bank, and the power vacuum created by the U.S.’s recent pullout from Syria have only served to amplify measures of global anxiety – not to mention the potential for another unforeseen terrorist attack. So what, then, with so much geopolitical uncertainty, are U.S. investors reveling in?

Few answers to the above-referenced question appear to be found in industry. For more than a year now, and since the U.S.’s trade spat with China began, measures of U.S. manufacturing activity, as indicated by the Institute of Supply Management’s ISM Manufacturing Index, have not only rolled over, but are now showing signs of contraction. Similarly, measures of industrial production and business confidence have also rolled over, with readings on industrial production now stagnant, at best, and business confidence reflecting some optimism, but certainly much less so than a year ago. U.S. and global GDP growth have slowed, corporate profits have been increasing at a low single digit rate, and capital spending among S&P 500 companies was up only 0.8% in 3Q19, after rising 4%, on average, since calendar year 2000. Of late, one of the only bright spots in industry has been an uptick in the U.S. Purchasing Manager’s Index, having reached a four-month high in November, and potentially signaling that the recent soft patch in corporate America is slowly beginning to abate.

Notwithstanding softness in industry, U.S. consumers continue to be strong. The unemployment rate in the U.S. has gradually receded from a reported 10% during the Great Recession, to a current rate of just 3.6%. More Americans are working, wages are expected to be up 3.2% in 2019 and an additional 3.3% in 2020, and inflation continues to be low at just 2% per annum. With fewer people out of work and a higher number of people earning more on a real, inflation-adjusted basis, retail sales continue to be strong, and consumer confidence is high. For now, consumers are carrying the ball, in terms of supporting the U.S. economy, as well as its financial markets. With consumers driving two-thirds of GDP and a U.S. Central Bank that seems willing to stimulate the economy to prevent any near-term recession, we may have just orchestrated a soft landing for what appeared to be a more serious, imminent recession threat just one short year ago.

For now, it seems likely that the U.S. is in the midst of a longer-term, secular bull market, supported by positive GDP growth, low unemployment, low inflation, low interest rates, low gas prices, an accommodative Federal Reserve Bank, and favorable tailwinds from tax and regulatory reform. We should remember, though, that cyclical bear markets, and even recessions, do take place within longer-term, secular bull markets, and that, for the most part, we can’t clearly see these market corrections coming. While things look fairly rosy right now, it is during the trying times represented by market pullbacks and recessions that we must truly keep the faith and maintain our composure in the midst of chaos. It is during these trying economic times that our faith in the ongoing advancement of both U.S. and global markets must truly remain unbroken.

To see his column in the RBJ, click here.