Is Optimism Rational?
The world is grappling with a series of challenges: Escalating wars in the Middle East and Ukraine, a cataclysmic hurricane in the Southeast, and the uncertainty surrounding the upcoming Presidential election. For investors, it feels like scaling a wall of worry.
While pessimism currently dominates public sentiment, a logical long-term perspective suggests optimism is warranted. The U.S. economy and markets have consistently overcome significant adversities. Historically, even major events tend to cause only typical drawdowns in the S&P 500, indicating that extreme negativity may be overblown. 1 2
However, the U.S. economy is amid the so called “soft landing” the Federal Reserve is trying to orchestrate. The most recent jobs report for September offers encouraging signs that we’re far from a recession. With 254,000 jobs added – including 78,000 in leisure/hospitality and 71,700 in health care – the economy shows signs of continued growth. 3 4
While it’s premature to declare victory over a potential recession, these job numbers represent a significant step in the right direction.
Certainly, the recent rise in equity valuations (as measured by forward P/E ratios) may create some headwinds for future valuations. 5
However, these are challenging to forecast over a five-year horizon.
Additionally, it’s worth noting that the Federal Reserve rarely cuts interest rates during periods of earnings growth recovery. 6 7
Despite these challenges, there’s reason for measured optimism. Soft landings can produce strong returns in the short run. Historical data shows that when monetary policy easing results from normalization rather than recession, equity returns have typically been positive. 8
In conclusion, while the case for pessimism may be seductive, the case for optimism is rational. The U.S. economy and markets have a track record of resilience and growth, even in the face of significant challenges.
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Tim Phillips, CEO, Phillips & Company
Sources:
- https://www.lpl.com/research/blog/middle-east-conflict-how-stocks-react-to-geopolitical-shock.html
- https://www.theirrelevantinvestor.com/p/thoughts-selloff
- https://x.com/GregDaco/status/1842186252377878753
- https://www.cnbc.com/2024/10/04/heres-where-the-jobs-are-for-september-2024-in-one-chart.html
- https://x.com/dailychartbook/status/1833807709172305951
- https://www.dailychartbook.com/p/dc-lite-208
- https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/guide-to-the-markets/?slideId=equities/gtm-peratio
- https://publishing.gs.com/content/research/en/reports/2024/09/12/a6a2e3c4-8531-4112-a556-60e06b7644ce.html
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