For the last few weeks, my columns have focused on key concerns circulating in today’s markets: rising interest rates, inflationary pressures, the unfortunate and saddening events unfolding in Ukraine, and stock market volatility.
Taken together, these are all issues that are weighing heavily on investor sentiment.
It is understandably challenging to stay optimistic in this type of environment, especially since there is very little coverage giving investors reasons to be positive. In short, a war and rising prices can easily cast a long shadow on positive economic fundamentals, as we’re seeing now.
But a closer look at the U.S. economy reveals several indicators signaling more growth ahead, and I think there are many under-appreciated reasons to be positive right now. Here are three big ones.
1. Corporate America is in Investment Mode
When U.S. corporations are optimistic about the future, they tend to invest more in labor, equipment, software, and other areas designed to facilitate growth and scaling. The opposite holds true when corporations are skittish about the economic outlook.1
Data suggest U.S. companies are optimistic.
Private nonresidential fixed investment – a proxy for business investment – jumped 7.4% in 2021, even when adjusting for inflation. This uptick in business spending marked the fastest rate of increase since 2012.
Perhaps not surprisingly, U.S. businesses spent the most on software and information-processing (blue line in the chart below), as the need to ‘digitize’ business operations was catalyzed during the pandemic and is bound to grow as remote work becomes the norm. Spending in this area of IT rose a stout 14% in 2021. The trend of ramping up business investment looks poised to continue: manufacturing firms surveyed by the Institute for Supply Management said they plan to increase investment by 7.7% in 2022, and services firms – which comprise a majority of the U.S. economy – expect a 10.3% increase.
Business Investment on the Rise, Particularly in Software and IT
2. Leading Economic Indicators are High and Rising
The Conference Board’s Leading Economic Index (LEI) is a useful indicator that can help investors gauge whether U.S. economic activity is in growth mode, plateauing, or decline. The LEI aggregates a handful of key leading indicators, like average weekly hours worked, jobless claims, manufacturer’s new orders, building permits, credit, consumer expectations, and more. In the LEI’s 50+ year history, only one recession has occurred when the index was high and rising – the 2020 pandemic-induced recession, which I would call an exception that proves the rule.3
At present, the LEI is hovering at all-time highs and is still notching increases, signaling growth mode here in the U.S. In February, the LEI increased by 0.3%, which followed a 0.5% decrease in January but a 0.8% increase in December. Importantly, the 6-month look at the LEI shows a 2.1% increase from August to February, again underscoring positive economic momentum in the U.S.
Altogether, the Conference Board sees 3% year-over-year U.S. GDP growth in 2022, which is a far cry from recession territory for the U.S. economy.
3. The Jobs Market is Historically Strong
The U.S. jobs market is strong and keeps getting stronger.
In the latest jobs numbers release, U.S. employers were seen adding 431,000 jobs in March, with particularly strong hiring in services industries like restaurants and retail. The Labor Department also said that hiring in January and February was stronger than initially reported, signaling that the jobs market is arguably better than most appreciate.4
The latest release marked the 11th straight month where job gains totaled more than 400,000, which marks the longest stretch of consecutive gains dating back to 1939. The unemployment rate fell to 3.6%, which now puts it very close to its pre-pandemic level of 3.5% (which is also a 50-year low). Put simply, labor markets like this one are not the stuff of recessions.
Bottom Line for Investors
I write often that the stock market can thrive in scenarios where widely-known negative stories receive all the attention, while under-appreciated but important economic fundamentals are overlooked. This dynamic is the definition of stocks climbing the ‘wall of worry,’ and I think it accurately describes the setup for the U.S. economy and markets heading into Q2.
1 Wall Street Journal. March 27, 2022. https://www.wsj.com/articles/capital-spending-boom-helps-raise-productivity-contain-costs-11648389600?mod=djemRTE_h
2 Fred Economic Data. March 30, 2022. https://fred.stlouisfed.org/series/PNFI#0
3 The Conference Board. March 18, 2022. https://www.conference-board.org/pdf_free/press/US%20LEI%20PRESS%20RELEASE%20-%20March%202022.pdf
4 Wall Street Journal. April 1, 2022. https://www.wsj.com/articles/march-jobs-report-unemployment-rate-2022-11648766857
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