Let’s step back and look at the big picture.
This market is currently just two months away from earning the title of the longest bull market in history.
That’s right. The “post-crisis bull run,” as it’s being called, is in its 112th month, right on the tails of the 114-month bull market from October 1990 to March 2000.
Since the bottom in 2009, the S&P 500 has returned over 300% with an annualized return of 16.7%. That’s an extraordinary amount of growth. But let me be absolutely clear — it’s not over.
When it comes to the big picture (macro) view of our financial markets and of our overall economy, there are three primary themes that we’ve been watching closely.
Each of these themes has far reaching effects in different areas of the market. Today, I will be kicking off a three-day series to fully explain all three themes.
Think of this macro view of our economy like the ocean tide. The tide ebbs and flows over a longer period of time and it causes all kinds of changes to the shoreline and even the inland landscape.
Individual waves are like trades. We want to look at the specific waves and see how they’re setting up. But without knowing what’s happening with the overall tide, you’re unlikely to find the specific waves (or trades) that are best for you.
The first big macro trend that is shaping our economy is the job market.
President Trump campaigned on the promise that his policies would provide jobs for American workers. Now, I know the president’s personality can be polarizing and I understand why some people love him and some people really can’t stand him. We’re not a political newsletter, so I won’t get into all of the details there.
But when it comes to the job market, the policies in the U.S. have gone far towards encouraging companies to create more jobs for American workers.
Today, the unemployment rate is the lowest it has been in decades. And each month, we’re adding hundreds of thousands of new jobs to our economy.
The corporate tax cuts are a big part of why this is happening. This year, corporations are paying just a 21% tax rate on their profits. This compares to a 35% rate last year. So companies are able to keep a larger portion of their gains.
And with more capital to spend, corporations can invest in new growth opportunities — which means hiring more people to take on new projects, and paying those people more as budgets allow.
The chain reaction to this strong job market is important.
Because with a larger portion of Americans employed, and with wages moving higher, people simply have more money to spend.
Now you should know, about 70% of our economy is driven by consumer spending. So if consumers across America have more money to spend, this is a very good thing for our overall economy.
Think about what happens as a large batch of newly employed consumers go shopping — or as people who just got a raise start spending that extra money.
Companies who sell to these consumers will generate higher profits. They will need more merchandise (which needs to be manufactured). They will hire more wait staff, or add new locations. All of this compounds on itself leading to more strength for future quarters.
In short, the strong job market is driving growth in many different areas of our economy. And that’s a very good thing for us as investors.
The second big theme shaping today’s economy is the robust energy market.
For the last twelve months, the price of oil has been marching steadily higher. Today, oil in the U.S. trades above $70 per barrel. And it’s even higher in Europe (where production is a bit more constrained).
Now the strong oil market is a conundrum for some economists. Because the U.S. is producing so much oil. We’re literally hitting record amounts of oil pulled out of the ground, to the point where we don’t have enough pipelines to pump all of that oil to refineries.
It’s a good problem to have, but a problem nonetheless!
So in an environment where we’re producing oil at a record level, why would prices be high? Usually when you have too much of something, the price goes down…
Well the answer is that we have so much demand for oil, that it almost doesn’t matter how much we produce.
Americans are driving cars and taking flights for vacations. Truckers are shipping products from manufacturing plants to consumers. Around the world, the growing global economy is thirsty for fuel. And all of this demand is driving the price of oil higher.
This is a great indicator of how well our economy is doing.
Because if it weren’t for a strong economy and healthy demand for fuel, the high level of production would cause prices to drop. Think of this like an indicator flashing green. The high price of oil is showing us that our economy is very strong.
Lately, there have been a lot of headlines about decisions that OPEC and Russia are making to try to increase production and sell more oil into this strong global energy market. For a short time, oil prices pulled back this summer.
But that pullback is now almost completely reversed.
And one of the main reasons why is because Saudi Arabia, OPEC, and Russia aren’t the key players in the oil market anymore.
Thanks to advances in fracking techniques, U.S. oil companies have been able to tap into shale deposits that used to be too hard and too expensive to get to. But new technology advances have made it cheap and very profitable to access this oil.
And now, the U.S. is the primary driver of the global oil market. So it matters less and less what Saudi Arabia or other Middle East countries do. This has definitely been a major shift of power, both economically and politically!
We’ll continue to talk more about some of the ways you can profit from this macro trend in the coming days. But for now, just know that the U.S. is now the dominant energy power in the world. And that’s great news for our economy.