Yellow Brick Road
Last week I attended an event that featured two individuals from Raymond James Investment Research group. It was a fact-filled, energetic and entertaining evening where our Chief Investment Officer and our Washington Policy Analyst offered observations on the economy and the upcoming election for President. Larry Adam, our Chief Investment Officer, based his presentation around a Wizard of Oz theme entitled "Yellow Brick Road." I’d like to share a few of his thoughts with you.
Cowardly Lions, take courage!
In Larry’s words, we have nothing to be afraid of when looking at the facts:
- Withholding taxes are at all-time highs, while jobless claims are plumbing new lows
- Total truckload shipments have continued to set new records (apparently a very good indicator of economic activity!)
- And, we are experiencing the longest economic expansion in our history - 124 months
While our current expansion is only half the magnitude of the most powerful recovery (1961-1969), it ranks fifth strongest from a magnitude perspective.
Who’s got heart?
Clearly, U.S. consumers are the tin men and women who are the heart of this recovery. U.S. consumption was up over 4% in the most recent quarter, above the average rate of about 2%. And elevated U.S. "quit rates" (Quit Rate- The number of people voluntarily leaving their current job as a percentage of the labor force) should lead to higher wage growth down the road. Who knew "quit rates" were such a good indicator of economic strength? In fact, the U.S. consumer as a share of the global economy is greater than all but one foreign country! In my opinion, the most appealing news of the evening: the U.S. consumer is earning more and saving more as a percentage of income than in any time in the last thirty plus years. That warms my heart.
Toto, we are not in Kansas anymore…
Turning attention to the bond market, right now global interest rates continue to move lower towards "unprecedented levels." We are definitely not in Kansas anymore. This record low interest rate environment is a direct result of continued easing from global central banks, slowing global growth, and trade concerns In fact, $17 trillion of global government debt is negative yielding. In other words, investors in many countries are willing to invest and receive less money down the road when their fixed income investment matures. I have mentioned this before, but the size of this negative yielding market shocked me…kind of like when Dorothy woke up in the Land of Oz. Larry cautioned, be very careful as you invest in fixed income. I second that!
There’s no place like home…
Larry’s final message was the iconic theme of the movie. Of course, he was referring to home as the US stock market, in particular the S&P 500. He shared a chart demonstrating US leadership in equity markets. Here at home, we outperformed non-US markets in eight of the last ten years. The average outperformance during this timeframe is 5.7%, a wide margin favoring domestic stocks. But really, there’s no place like home. U.S. stocks are priced about average relative to earnings, the 4th quarter is seasonally the strongest, and corporate share buybacks remain near historic highs. This is good news for investors.
I must admit I omitted Larry’s thoughts about the Wizard in our current picture. He ruminated on "the man behind the tweet curtain" but it is my standard operating policy to avoid discussions and debates on presidential politics. I will state that Larry and I share the view that volatility is unlikely to abate given our current political environment.
The Wizard of Oz is an allegory. It is intended to teach us many things – self-reliance, the value of friendships, the importance of family and place. So, is it the journey or the destination that matters to you? Are you more concerned with the path you travel or are you focused on your outcome? Let me suggest that in the Wizard of Oz as in life, the journey AND the destination both matter. If you watch your step and travel with good company, your trip along the Yellow Brick Road might even be better than Dorothy’s.
Ralph McDevitt November 20, 2019
P.S. Fun Facts: "Yellow Brick Road" was also a song written and performed by Elton John and the title of one of his best albums. The double album was originally released in October, 1973. The S&P 500 was at 109.80 in October, 1973 and went lower for the next 14 months, closing at 67.07 in December, 1974. Sir Elton is currently on his farewell tour, aptly named the "Yellow Brick Road Tour". As of the close on Monday, November 18, 2019, the S&P 500 is at 3122.03. Dig that, baby!
Any opinions are those of Ralph McDevitt and not necessarily those of Raymond James.
