After 2020’s remarkable recovery and a relatively calm 2021, market volatility has returned with a vengeance. The combination of rising inflation at home, likely higher interest rates and geopolitical turmoil are making many investors nervous. With all of this happening in a mid-term election year, market volatility is to be expected. For investors, the most important things to think about are the prospects for economic growth and corporate profits.
A global pandemic, inflation, and geopolitical turmoil aren’t enough to stop the US consumer!
The US consumer is still the driving force in the US and global economy. As long as the US consumer is still willing and able to spend money, the US economy will do well and investors in great American companies will be rewarded. Consumer spending has completely recovered from the COVID recession and is now setting new records. The personal savings rate is still higher than it was for most of the past three decades. Household debt service remains near 40-year lows. Unemployment is below 4%. Although geopolitical events will contribute to higher energy costs and inflation, by every other measure the US consumer is doing exceptionally well.
China and Russia are Not an Existential Threat to the US Economy
he Chinese equity markets are experiencing their third major correction in less than ten years. US stocks have recovered strongly from the pandemic market crisis and have gone on to make new highs. Chinese equities are still struggling at the same levels they were at in March of 2020. This is not a sign of a healthy economic recovery, or of a country in a position to replace the United States at the top of the economic ladder.
The size of a nation’s economy is composed of two factors: the number of people who are working, and the output each worker produces, also called productivity. Chinese population growth is slowing dramatically. China abandoned its one-child policy nearly a decade ago in response to an aging population and slowing growth. China is rapidly losing the population growth advantage it once had. Improvements in productivity can apply equally well to the American workforce.
The United States is the second largest energy producer on the globe, the top oil and natural gas producer, and is ranked 3rd in global food production. The only country that produces more energy than we do is China, and the only reason they produce more energy is because of coal, which is over 60% of Chinese energy production. Geopolitical conflicts with Russia are a major issue for countries like Germany which are reliant on Russian energy imports. Neither Russia, nor Ukraine, are significant trading partners of the United States.
Higher prices for energy and basic materials will increase inflation, but they will also incentivize US energy companies to increase domestic production. US oil production is still 12.5% below pre-COVID levels. Importantly, history shows that while inflation hurts consumer confidence, geopolitical conflicts do not. As long as consumers are willing and able to keep spending money, the US economy will be fine.
Even if a recession happens, history says the right move is to stay the course and stay fully invested in great American companies.
Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer