Trends Point to Brighter Economic Times Ahead
October 25, 2016 | Your Finances
Blame low oil prices. In a stunning fall, oil prices hit a 12-year low in June, trading below $30 a barrel, down from a peak of $151.72 achieved in June of 2008.1 What once seemed a positive for consumers became a serious threat to economic growth, prompting fears of a recession.
A sense of economic gloom set in as low inflation, depressed corporate profits and anemic growth connected to low oil prices conspired to stagnate the global economy. A pessimistic conventional wisdom emerged. The fear? A low growth “new normal” that doomed the economy to a 2 percent growth rate in perpetuity.
This mindset can lead markets and investors into dangerous territory. Concerns bred from economic trends spawned by low oil prices have caused some investors to stay on the sidelines during the bull market, under-allocating to equities and potentially sabotaging their financial future. Investors should be careful not to give in to the general pessimism and reallocate away from stocks; such action could compromise their long-term financial goals.
An examination of the evidence reveals that the economy and the markets are actually in pretty decent shape. While U.S. economic growth isn’t as robust as it could be, our economy is outperforming most others—and the market reflects that reality. Recent trends point to solid reasons for optimism that the U.S. economy may be on the verge of a growth breakout on the upside, which could extend the length of the seven-year-old bull market, the second longest bull market in history.
The Current State of the Economy and Markets
An analysis of underlying economic metrics shows that the economic picture is far from dire. While there is no doubt that U.S. economic growth is substandard, even gross domestic product trended upward in 2014 and 2015. Unemployment fell to a post-recession low of 4.7 percent earlier this year.2 U.S. stocks have provided compelling returns and relative outperformance versus their global counterparts since 2007. Remarkably, investors who have reviewed their year-over-year performance at the end of each quarter since March 30, 2011, have seen 20 of the last 22 readings favor U.S. equities.
However, international equities are gaining the upper hand, outperforming U.S. stocks in the near term as international economies begin to demonstrate more strength. For the first time since the fourth quarter of 2012, emerging market stocks beat U.S. equities on a year-over-year basis. This supports the case for a diversified portfolio, as market sectors tend to rotate in and out of favor.
The Case for Higher Growth
There is a clear reason for optimism that the U.S. economy is shaking off the lingering effects of the oil price shock and entering a higher-growth mode. The drag of low oil prices is receding as oil is stabilizing in the $50-a-barrel range, easing deflation fears, reviving corporate investment and reinvigorating the manufacturing sector. At the same time, consumers have paid down debt, and government spending may track upward after the election.
Here’s a rundown of the case for higher growth:
- Consumer spending: Since the end of the recession, consumers have paid down a considerable amount of debt. Consumers are now in a much better position to spend, with their average debt-to-asset percentage ratio where it was in the early 1990s. Consequently, consumer confidence has risen to the highest levels since the recession ended in June 2009.3 A confident, employed consumer with less debt is more likely to spend.
- Government spending: While the candidates are dramatically different, both have pledged to increase government spending. If such an increase actually takes place, it will reverse a trend of declining government spending. The U.S. government’s contribution to economic growth in this recovery shrunk by the largest amount on a three-year rolling basis since the mid-1950s. Spending on infrastructure such as roads and bridges, for example, will create jobs and demand for construction equipment.
- Business/industrial spending: While the extended oil price decline has benefited consumers, it’s been a negative for the energy and manufacturing sector. These sectors are benefiting from a stabilization in oil prices. Overall, businesses are feeling more confident about their financial condition and, like consumers, are more likely to spend and hire, contributing positively to economic growth and corporate profits.
The Take-Away for Investors
Turn on the news and it is easy to get mired in negativity. It’s not hard to understand why many have clung to the negative point of view about the U.S. and global economies and the risks tied to lower oil prices, using this outlook to justify little to no equity exposure.
It’s all too easy to defer to the conventional wisdom, whether that’s positive or negative. However, those points of view may or may not be tied to the actual reality, as seen in hard economic numbers. Before reacting, do some research and decide whether to change your point of view about the economy and markets based on facts rather than what talking heads are spouting.
In a similar fashion, a personal investing strategy should always be based on individual goals, risk tolerance and situation. Sticking to a reasoned investing strategy always makes sense, regardless of the economic and market environment.
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities, and life insurance with long-term care benefits) and its subsidiaries. Northwestern Mutual Investment Services, LLC (securities), subsidiary of NM, broker-dealer, registered investment adviser, member FINRA and SIPC. Northwestern Mutual Wealth Management Company® (NMWMC), Milwaukee, WI (fiduciary and fee-based financial planning services), subsidiary of NM, limited purpose federal savings bank.
The opinions expressed are those of Northwestern Mutual as of the date stated on this publication and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poor’s.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. Diversification and strategic asset allocation do not assure profit or protect against loss. Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market.
1 Source: International Energy Agency, “Monthly Oil Prices,” http://www.iea.org/statistics/monthlystatistics/monthlyoilprices/
2 Source: U.S. Bureau of Labor Statistics, Department of Commerce, “Labor Force Statistics from the Current Population Survey,” http://data.bls.gov/timeseries/LNS140000003 Source: U.S. National Bureau of Economic Research, “US Business Cycle Expansions and Contractions,” http://www.nber.org/cycles/cyclesmain.html