It’s a Goldilocks economy: Grab a comfy seat
The timing is just right for owning stocks
The Dickens of 10 years ago wasn’t the worst of times. Financial crisis! Recession! Decimation of the world’s retirement savings! The Dickens of now isn’t the best of times.
Yet almost no one recognizes it. Pundits grouse about growth-induced inflation looming. Europeans fear economic deceleration and deflation. Everyone fears politics.
Yet our global GDP growth of 3% isn’t too hot or too cold — it’s Goldilocks’ perfect porridge. Just right.
But we’re a worrying world. And in early 2018, stock market gyrations and political noise are distracting us the way shiny objects lure fish. I’ve no clue how long we’ll remain distracted. Maybe until after our mid-term elections?
What shouldn’t worry us is the financial picture. Overall U.S. inflation is low, just 2%, and it’s slightly lower globally. All major segments of America’s economy are growing smoothly. All major countries are growing synchronously for the first time in this economic cycle. Unemployment is lower than in all but a few months since 1970.
Folks who abandoned America’s labor force long ago are finally flocking back. By that I mean the chunk of nonworkers, aged 25 to 54, who gave up seeking jobs (and hence aren’t counted in official unemployment — the inverse of what’s called the “Labor Force Partic- ipation Rate”). These returning workers can expand business capacity, helping communities grow from Maui to Miami.
Egghead economists (who never predict anything accurately) believe low unemployment plus increasing economic growth presage much higher inflation and long-term interest rates. Wrong. This theory, originally called the Philips Curve, was disproved decades ago. But economists are super-slow to learn — way too ivory-towered. Because of them, folks fear that rising inflation will boost long-term interest rates. The
10-year Treasury yield’s flirtation with
3% drives ’em nuts.
But labor market pressures never drive inflation. So what does? The answer is this: the broad quantity of money growing faster than GDP (the total of goods and services we create). Plain. Simple. See my Nov. 5 column for a deeper explanation.
That money, technically called M4, has been Goldilocks-like, too. It’s been growing, but slower and more moderately in this economic expansion than in any expansion of your lifetime — even if you’re really old. It’s why inflation remains low and will continue to remain so. And, hence, so will inflation’s contribution to long-term interest rates.
Michelle Wolf ’s monologue at the White House Correspondents’ Dinner and Kanye West’s tweets can hog headlines for days, keeping us distracted. People keep envisioning troubles. As I said, when the 10-year Treasury yield touched 3%, investors went bananas. It rose from 2.8% to 3% in about a month. But look back at history. We’ve often experienced hugely higher jumps from absolutely higher beginnings without anything bad happening at all.
If a 2/10ths of 1% increase in longterm interest rates makes it unprofitable for any borrower to use money, for building a chemical plant or buying a house, for instance, or if it makes that borrower un-creditworthy somehow — no bank should be lending to them anyway. This is why minor interest-rate wiggles never have a big impact, good or bad.
I love how this Goldilocks world seems so invisible to everyone (particularly to central banks like our Federal Reserve, who never, ever foresee anything right). If you Google the definition of Goldilocks economy, you’ll find that we are living in one now. A Goldilocks implies that stocks will rise.
So once we stop worry-wiggling and stocks can stop zig-zagging, we will cross a classic bull-market divide. Sir John Templeton said it this way: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Through this sentiment cycle, stocks climb a proverbial and legendary “wall of worry.”
Stocks rise up that wall as reality disproves prior fears. Today’s too hot/too cold worries are bricks in the wall. Reality is splendid, and it always wins.
So be greedy when others are fearful and fearful when others are greedy. With fearful folks blind to Goldilocks, be greedy. Own stocks. The right time to be afraid is when almost no one else is.
Ken Fisher is the founder and executive chairman of Fisher Investments, author of 11 books, four of which were “New York Times” bestsellers, and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter @KennethLFisher
The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.