Confidence Breeds More Confidence, Which Breeds Growth

Written by Gary Alexander

The attack on Pearl Harbor on Sunday, December 7, 1941 shocked America but economically, it ignited our dormant nation into action. Economically, America went from 14.5% unemployment in 1940 to barely 1% in 1944, due mostly to the united war effort.  Meanwhile, U.S. GDP growth rates exploded to +18.9% in 1942 and +17.0% in 1943.

Market recoveries often follow “Days of Infamy,” perhaps because terrorist attacks tend to unite us in a greater cause, drowning out our previous petty-sounding arguments.  As I’ve shown in the past, stocks rose after the JFK assassination in 1963, the Challenger explosion in 1986, and the 9/11 attack in 2001 (GDP growth soared by an average 6.3% per year, 1964-66, +4%/yr. in 1986-89, and +3%/yr. 2002-2006). Perhaps that’s why the stock market has done so well since the election of Donald Trump, which many pundits in the press and in academia have called a “Day of Infamy” or “the end of the world as we know it.”...

In his speech in Cincinnati last Thursday, President-elect Trump began by saying, “We’re going to find common ground, bring all of the nation together. We’re a very divided nation, but we won’t be divided for long.  We’re going to find common ground.  To succeed we must enlist the effort of all Americans.  For too long, Washington has tried to put us in boxes, to separate us by race, age, income or geography. We spend too much time focusing on what divides us.  When America is united, nothing is beyond our reach.”

Inspiring words, perhaps written by others, but delivered with conviction.  Trump concluded with this challenge: “Americans must ignore the pessimists and embrace the optimism that has always been the central ingredient of the American character… somewhere along the way we began to think small.  I’m asking you to dream big again, and bold and daring things for your country will happen once again.”

The press clips from that speech focused on the negatives – his loose words, flippant asides, or smirking braggadocio, i.e., his “shtick” – but that merely proves the President’s gripe about the bias of the press.

Confidence Breeds More Confidence, Which Breeds Growth

The stock market isn’t the only economic indicator on the rise. 

• Consumer confidence,
• GDP (current and projected), and
• retail sales

are all surging forward.  Confidence works wonders.  FDR was right when he said, “The only thing we have to fear is fear itself.”  Flip side: Showing confidence breeds more confidence...

• On the same day Trump spoke in Cincinnati, the Institute for Supply Management (ISM) announced that its manufacturing index rose to 53.2 in November, up from 51.9 in October.  
  • The new orders component rose to 53, from 52.1 in October.  
  • Overall, 11 of the 18 industries surveyed reported growth in November.
• Last Tuesday, the Conference Board reported that consumer confidence soared to 107.1 in November, up from 100.8 in October, reaching the highest level in nine years!  
  • The “present situation” component hit 130.3 in November, up from 123 in October.  Ironically, most of the consumers that the Conference Board surveyed were contacted before the Presidential election, so the post-election euphoria could be higher...
• The Organization for Economic Cooperation & Development (OECD) last week revised its forecast for U.S. GDP growth to 2.3% in 2017 and 3.0% in 2018.  OECD also forecasts 2.9% global growth in 2016, 3.3% in 2017, and 3.6% in 2018.
• Last Tuesday, the Commerce Department announced that GDP growth surged at a 3.2% annual pace in the third quarter, up from its initial estimate of 2.9%.  
• Corporate profits soared 6.6% in the third quarter, which bodes well for business spending in the fourth quarter.  
• The GDP is now growing at the fastest pace in over two years and the fact that consumers are spending more is the most important reason why: Last Monday (Cyber Monday) sales rose 12.1% to $3.45 billion, an all-time record.  Since consumers account for about 70% of GDP, it appears that the strongest GDP growth in more than two years is sustainable.

Can this euphoria continue?  Yes, for a time, but be aware that the political pendulum seldom stops in the middle.  We keep swinging to extremes.