By Pierre Villere
I can’t help but follow up on my column from a couple of months ago when I opined that a strong stock market was a harbinger of the economy, and what lies ahead. Now that 2019 and the decade it capped have come to an end, it’s worth reviewing the markets and what they foreshadow. In addition, the many geopolitical pressures from various directions don’t even seem to be moving the needle on the economy in particular, and sentiment as a driver of the underlying economy in general. Let’s take a look at both.
First, the stock market: Our securities markets are extremely efficient, as the consensus of earnings throughout all publicly-traded stocks are reflected in the various averages, including the Dow Jones Industrial Average, the Nasdaq, and my favorite barometer, the S&P 500. That index is measuring a broader market segment than the Dow, and is not as tech-heavy as the Nasdaq. And as I explained in my prior column, investors are looking out at the next 12 to 18 months and investing on the basis of where stocks are going, not on where we are today. That is what drives stock prices, and the averages reflected in the various indexes.
In 2019, the S&P 500 rose by 29 percent, the Nasdaq by 35 percent, and the Dow Jones Industrial Average by 22 percent. Both the S&P 500 and Nasdaq posted their biggest one-year gains since 2013, while the Dow’s performance was its best since 2017. As stocks continued to rise, Wall Street put recession fears on the back-burner, especially as the U.S. economy’s moderate pace of expansion held steady as I indicated previously. Solid consumer spending and a robust labor market with 50-year record low unemployment are key factors. But as I have been reporting for months now, an apparent recovery in the housing market, which has been acknowledged by most economists, is another key driver as it represents 15-18 percent of our Gross Domestic Product.
In my prior column a couple of months ago, I expressed concern about the downdraft of global economies, which are not as strong as ours, and how that may affect our own economy at home. Now the market has expressed renewed optimism in the signing of several new trade deals toward the end of the year, including a revised North American trade agreement to replace NAFTA and, after months of on-again, off-again negotiations, the long-awaited phase one trade deal with China. The de-escalation of those trade tensions was also a boost for the global economy, a previous concern of mine, as tariffs from the last year and a half of the trade war have weighed heavily on international trade volumes. My view of the possible pressure of a global slowdown as I expressed a couple of months ago have therefore eased, and I am less concerned about this factor as a downdraft on our economy.
Also, Wall Street investors are at ease knowing that the Federal Reserve is now on hold, after signaling that it has no plans to cut interest rates in 2020; it will remain on the sidelines unless inflation flares up.
But there are many non-economic, geopolitical pressures that loom over us, with the Trump impeachment proceedings, the sudden and intense flare-up in our relations with Iran, and the uncertainty of the 2020 election cycle being the most significant. We would think these issues, taken together, would rattle sentiment and cause consumers to tighten their wallets in an expression of caution, but as of this writing, they haven’t. The Conference Board shows consumer attitudes pulled back ever so slightly in December relative to November, but overall remain at historically favorable levels. And the other widely-recognized sentiment measure comes from University of Michigan, whose Sentiment Index remained largely unchanged in late December at the same very favorable level recorded at mid-month.
We have rung in a new decade, and our firm remains enthusiastic about a robust construction economy for at least the first part of the 2020s.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter – @allenvillere.