There is this to be said about the Many. Each of them by himself may not be of [much] quality; but when they all come together it is possible they may surpass the quality of the few best.
~ Aristotle, Politics (around 340 BC) via Arthur Herman, The Cave and the Light (2013)
A New Chapter
The new president’s first ten days in office confirmed that he will be unlike any president we’ve had since perhaps the 1980’s. It began with his inauguration speech, in which he pledged America-first policies and giving power back to the people. He then shocked the public by actually delivering on his election campaign promises. The ensuing protests were a reminder that we live in a democracy, first described by Aristotle in Athens 2350 years ago. It’s not new, and it works.
Still, we are likely witnessing a turning point in American – and probably world – history. This is not an abrupt shift to be anxious about, but perhaps a new chapter succeeding the previous while continuing under the same democratic principles.
Business Optimism Index
What will this new chapter look like in our economy and markets? Here’s what’s the data are beginning to show.
Optimism surge. Optimism surged among investors, business owners, and consumers alike, as I wrote in recent posts. The NFIB’s Small Business Optimism index is the most vivid example (see chart above) – its 11-point jump was the largest since the index began in 1986.
Higher inflation. I wrote extensively about rising inflation pressures since mid-2016 (see here, for example). Consumer inflation just rose above 2%, to 2.07% in December. Inflation around 2% is considered optimal for the our economy. However, this will likely mean higher interest rates and therefore lower bond returns in the coming quarters.
An upshift in economic growth. President Trump’s team pledged to boost economic growth to 4% based on pro-business policies, lower taxes, and reduced regulation. Although it’s too soon to tell, the widespread surge in optimism suggests that it might work. Higher consumer confidence is generally followed by higher spending, which accounts for 70% of our economy. Business confidence such as the NFIB survey above includes hiring plans. Already, payrolls increased by 246,000 in January according to ADP, and by 227,000 according to the official BLS figures – both above expectations.
In closing, I’d like to leave you with this thought. The recovery since 2009 has been weak in many respects: business confidence (which you can see clearly on the chart above), low GDP growth, labor participation, and wages – all despite continued government deficit spending and life support provided by the Fed. With the policy rate still near zero and a record $20 trillion in debt, there was no reasonably good way of removing that life support. Then, the election of a Republican pro-business president provided a way out. Still not completely understood (given the divided political sentiment), the sudden and remarkably strong surge in optimism provided a positive outcome no one expected.
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