The U.S. economy continues to show resilience, and the latest round of economic data — covering GDP growth, job openings, the Federal Reserve’s inflation gauge, and the monthly jobs report — could indicate that a “soft landing” is within reach. However, many experts argue that this "landing" isn't quite the slowdown many anticipated. From Big Tech earnings to complex weather patterns affecting the data, and the looming election, it’s clear the current economic climate is anything but static. Meanwhile, the Nasdaq Composite closed at its 28th record high of the year, indicating sustained investor confidence.
What the Data Says About Sustained Expansion
According to Schwab Senior Investment Strategist Kevin Gordon, the economy is currently experiencing what he describes as a "soft landing." He noted, "It’s not a destination; it’s a process." In fact, San Francisco Federal Reserve President Mary Daly recently published an article emphasizing a term she calls "sustained expansion." In her view, achieving stable growth is just the beginning, not the end goal, for the U.S. economy. These perspectives suggest that while the idea of a “landing” might indicate stability, it also signifies that the economy is entering a new phase of moderate yet continuous growth.
This week’s updated GDP metric will shed further light on economic strength. Despite the unprecedented declines and subsequent surge in 2020, U.S. economic growth has maintained positive momentum, with only minor interruptions in early 2022. Moreover, recent revisions to GDP figures for Q2 2022 shifted earlier negative numbers to positive, underscoring the potential for ongoing expansion.
Analyzing the Unconventional Bull Market
This period of economic growth has produced a “weird bull market,” according to Ritholtz Wealth Management Chief Market Strategist Callie Cox. In her words, "It’s a strange market; I’m scratching my head too." The Nasdaq’s outperformance in 2023, compared to more traditional small-cap indexes like the Russell 2000, highlights the unusual nature of this market phase. While smaller companies generally thrive during expansions, large-cap tech stocks have instead driven recent gains, suggesting that this bull market might defy typical historical patterns.
One explanation is the prevailing interest rate environment. Cox noted, "The unusual market is largely a product of the Fed’s aggressive rate hikes." Over the past 40 years, the Federal Reserve's rapid increase in rates intended to counteract inflation should have dampened economic activity. Yet, as Torsten Sløk, chief economist and partner at Apollo Global Management (which owns Yahoo Finance), points out, many companies have actually seen their interest burdens decrease since the pandemic began.
The Impact of Rate Hikes on Corporations
As Sløk explains, "Although firms with weak earnings, revenues, and cash flows have been affected, the negative impact of Fed rate hikes on corporates has been limited overall." This resilience can be attributed to better cash flow management and adjusted capital structures. Essentially, many U.S. corporations are more adept at handling interest fluctuations than in previous decades, making them less vulnerable to rate changes.
For investors, this environment has notable benefits. According to Gordon, "In a phase of sustained expansion with a strong labor market, stable inflation expectations, and moderate economic growth, investors are generally in a favorable position." These factors offer a positive outlook for the continued performance of equities and may explain why the Nasdaq continues to see new record highs. The confidence among investors underscores a view that despite the Fed's monetary policy adjustments, the U.S. economy remains stable and prepared for sustained growth.
Looking Ahead
As we approach the end of the year, the critical question remains: Will the U.S. economy continue on this path of moderate expansion, or are there risks on the horizon that could disrupt this trend? While this week’s GDP and inflation data will provide a clearer snapshot of economic resilience, it’s crucial for investors to stay informed on factors such as evolving interest rates, global economic conditions, and corporate earnings reports.
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