The Unappreciated “Fuel” Powering This Market Higher

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
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Turn on the TV and you’ll hear the same depressing litany of bad news: terrorist attacks, natural disasters, political dysfunction, federal investigations or another test launch in North Korea.

The news is so unremittingly awful, in fact, that many folks simply cannot fathom the stock market’s incredible performance this year.

This is partly because the national media gives short shrift to positive factors like low inflation, rock-bottom interest rates, cheap energy, rising corporate profits and two consecutive quarters of 3%-plus economic growth.

But also because a less tangible but still powerful force is driving share prices higher: consumer, business and investor optimism.

As Investor’s Business Daily recently noted...

  • The National Association of Manufacturers reports that for the first three quarters of this year, 91% of manufacturers said they were positive about their own companies’ outlook, the highest three-quarter reading in the survey’s 20-year history.
  • Gallup’s investor optimism index hit a 17-year high in September, while its weekly economic confidence index has been in positive territory since November 2016, after being mostly negative since 2008.
  • The University of Michigan’s Index of Consumer Sentiment has averaged 96.2 so far this year, compared with 91.4 over the same time period last year.
  • The Small Business Optimism Index has averaged 104.9 through August, according to the National Federation of Independent Business. That’s up nearly 12% from the year before.
  • In September, the IBD/TIPP Economic Optimism Index marked its 12th straight month in positive territory, the first time that’s happened in 12 years.

Of course, if you want a real measure of optimism, consider the market itself. The Dow has hit more than 50 all-time highs this year.

Stocks are an excellent leading economic indicator. Why? Because investors are a forward-looking bunch.

Collectively, they incorporate into share prices their projections of corporate profits six to nine months out. And this historic rally tells you they’re optimistic.

Perhaps you should be too. And not just for financial reasons.

Research shows that when we alter our perceptions about the future in positive ways, it reduces anxiety and improves physical and mental health.

Optimistic beliefs are often the precursor to positive actions. This is particularly true in the investment arena.

In my experience, successful stock market investors have an optimistic long-term view that simply doesn’t have an off switch.

That doesn’t mean we don’t hedge our bets or take concrete steps to reduce risk and volatility. We do.

But we also tend to have an abiding faith in the ability of entrepreneurs, businesses and capital markets to innovate and meet people’s economic wants and needs.

Studies show that pessimism, on the other hand, promotes passivity and hopelessness. Research by psychologist Martin Seligman demonstrates that pessimists often behave helplessly, harming their chances of achieving desirable results and even feeding depression.

Optimism doesn’t mean we turn a blind eye to negative circumstances. But there is a huge payoff in seeing gray skies as just passing clouds.

Optimists expect to have meaningful relationships, good health and happy, productive lives. They live longer, make better financial plans, and despair and worry less. They avoid needless anxiety and adjust better to stress.

Optimism is a source of vitality and hope, courage and confidence.  It motivates us to set goals, to take risks. It encourages persistence in the face of obstacles.

If you are not optimistic, why would you start a new business, expand an existing one or risk your hard-earned capital in the stock market?

You wouldn’t. And, in fact, too many people haven’t.

According to EPFR Global, investors yanked $36 billion out of U.S. stock mutual funds and ETFs in the third quarter. In fact, more money has flowed out of than into equity funds this year.

Large cash holdings mean there is still plenty of money on the sidelines ready to come into the market, driving share prices higher.

The U.S. economy posted its best six-month stretch of growth in three years – and in the face of two devastating hurricanes.

With regulations and other federal red tape coming down – along with individual and corporate tax rates – there are plenty of good reasons for optimism.

You should recognize them – and act on them.

Good investing,

Alex

Thoughts on this article? Leave a comment below.

An Investment in Global Optimism

Alex is quick to point out that, despite the gloomy narratives you hear in the news, life is getting better for most people over time.

This is particularly true of the global poor. That’s why Alex recommends the iShares MSCI Emerging Markets Fund (NYSE: EEM) to his Oxford Communiqué subscribers.

Here’s Alex checking on the fund back in September...

As I write, the S&P 500 is up 12% year to date. Not bad.

But not nearly as good as Pacific Rim stocks, up 19%. Or European equities, up 20%. Or developing markets, up 31%.

The latter is the year-to-date return of the iShares MSCI Emerging Markets Fund (NYSE: EEM) in our Oxford Trading Portfolio.

Expect this outperformance to continue for several reasons.

The first is that GDP growth in these countries is much stronger. China is growing at 6.7%. India is growing at a 7.1% rate. Even Indonesia is growing 213% faster than the U.S.

It’s easier for a business to experience rapid profit growth in an accelerating economy.

Many emerging market economies are resource-based. And commodity prices are rebounding. So far this year, lead, copper, zinc, aluminum, palladium, silver and gold are all up by double digits.

Emerging markets also benefit from a weaker dollar. The greenback has declined 10% this year.

Why is that good for emerging markets? Because their dollar-denominated debts become cheaper to service, simpler to roll over and easier to pay back.

(History also shows that international lenders are more willing to lend whenever the U.S. currency falls.)

There are important demographic shifts afoot as well.

Around the world, citizens of developing countries are migrating from rural areas to cities. Their discretionary income, purchasing power and affluence are all growing.

Unsurprisingly, they want everything we already take for granted in the West: homes, cars, computers, TVs, smartphones, credit cards, healthcare, appliances, cosmetics, financial services and so on.

- Samuel Taube with Alexander Green

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