An occupational hazard for me is that I must pay attention when there is significant volatility, not only in the stock market, but in the mood of the country. Both have seen an uptick in volatility this fall. Much of the volatility in mood stems from the run-up to the election. But anecdotally, this year the angst seems more pronounced than in the past and for a greater diversity of reasons.
It was just a couple of months ago that the jobs report was rather dismal (114,000 new jobs created in July). Unemployment had risen for the fourth straight month, coming in at 4.3%, the stock market suddenly dropped, and the fear of recession appeared to be the consensus.
Fast forward to October’s report of September data. The numbers show that 254,000 jobs were created, and unemployment fell to 4.1%. Average hourly earnings increased 4% over those of a year ago. The Fed finally cut interest rates. And at the time of this writing in early October, we have witnessed the stock market (defined by the S&P 500) surge by 10.9% since early August. Some people have a hard time separating what I have just described (the circumstances of our present condition) from their thoughts and feelings about it. But I want to warn you, financial well-being is derived from actions, or inaction, based on thoughts and feelings about those circumstances. Please pay attention.
With the U.S. stock market up 34% for the past year, some investors regret that they aren’t more heavily invested in the market and are frozen from acting. Others suffer FOMO, the fear of missing out, and are jumping in to follow the trend. Many academics would have us believe that trend following is just dumb, but I could point to some very learned economists who say it is totally rational. That’s a subject for a later column, if there is interest.
The one thing that appears to be a safe bet today is the U.S. consumer. I often reflect on how much better our living standard is today than when my widowed grandmother, in 1933, bought some cows and chickens and started selling milk, butter, and eggs to provide for her and my father during the depression and beyond. The moral is that our living standard is built on our consumption of goods and services.
Our economy is consumer-based and much more a service economy today than ever before. “But what does that have to do with anything?” you may ask. There is significant correlation between changes in GDP and changes in consumption, so these are numbers that everyone should pay attention to, but hardly anyone does. We consumers have little interest in consuming less. The important point is that the volatility of both measures has shrunk dramatically since my grandmother’s day.
There are three reasons for the drop in volatility: 1) the very significant rise of the service sector (that’s MDs and CFPs) which now accounts for 82% of the workforce; 2) the total lack of correlation between the traditional sectors of the economy; and 3) the willingness of governments (both federal and state) to soften the blow of downturns. Say what you will about the federal debt problem; as consumers we are a spoiled bunch and much of the debt is fueled by our desire to enjoy improved living standards. It is not all roses, however. There is always room for an exogenous shock that nobody can foresee. Let’s assess two major risks to economic stability as we see them today.
The possibility of World War III is not out of the question and paints a significant risk. Simply watching the nightly news and observing the destruction brought on by the regional conflicts, particularly in the Middle East, is gut-wrenching. Many of you are too young to recall the 1960 drills in elementary classrooms around the country. In what now seems rather absurd, we practiced crawling under our desks to protect ourselves from nuclear fallout. That was when there existed two players, the U.S. and Russia. What kept us from waging war against each other? Mutual assured destruction. The risk of escalation is much greater today simply because the number of regimes that can engage in all-out warfare has grown significantly.
A second risk (or opportunity, depending on your worldview) is the emergence of AI. It is still very early to properly assess the form and impact that AI is going to have. Full and broad scale adoption will, undoubtedly, bring about significant change. Every commentator appears to be obsessed with the impact on jobs and the unemployment rate, predicting that jobs will be lost, and unemployment will soar. While vast numbers of people will lose their job, unemployment is not likely to rise dramatically because new jobs in new industries will be created to take their place. The displaced workers will retire or retool. It is also very likely that the productivity gains of the new industries will be greater than those lost in the dying industries. Isn’t life in these United States truly exciting? I don’t know about you, but I am looking forwarding to getting past the election and into 2025.