The Most Important Number of the Week Is 114
(Bloomberg Opinion) -- If it’s true that Democrats are bad for business, the economy and financial markets, then someone forgot to tell the investors with the most at stake.
Congressional Republicans have been out in force telling anyone who will listen that President Joe Biden’s $1.75 trillion spending plan is nothing less than ruinous. Inflation, they point out, is already the highest since 2008, and the plan will make it even worse. On top of that, economic growth slowed to a crawl in the third quarter, causing the dreaded “stagflation.” Oh, and the supply chain is in disarray, putting the end-of-year holidays in jeopardy. Things are so bad that companies can’t even hire much-need employees because of Democratic policies that incentivize workers to stay out of the labor force.
And yet, sentiment among institutional investors is for the first time higher now than it was at any point during the Trump administration, according to the State Street Investor Confidence Index released this week. The monthly gauge for North America rose to 114 for October, exceeding the high during the Trump administration of 113.5 in April 2018, when Republicans controlled both houses of Congress. April 2018 was also just a few months after Trump signed the Tax Cuts and Jobs Act into law, reducing corporate tax rates. Biden’s plan, while not raising the corporate tax rate, would institute a 15% minimum — and yet investors are not bothered in the least.
It’s important to understand that a rising tide — caused by unprecedented monetary and fiscal stimulus by top central banks and governments around the world, which has added some $20 trillion to the money supply since early 2020 — is not lifting all boats in unison. So, although sentiment toward the U.S. is at its highest since the administration of Barack Obama — a Democrat — in 2016, the measures for Europe and Asia have fallen and are below the U.S. index. This is a clear sign that investors prefer the U.S. to anywhere else.
This bullishness toward America is manifested in the performance of various financial assets. The MSCI USA Index of equities has soared 21.9% this year, more than three times the 6.24% gain for the MSCI All-Country World Index excluding the U.S. And despite all the concern about supply-chain disruptions and the rising cost of raw goods and materials along with higher wages, forecasted U.S. company earnings have actually risen at a faster rate this year than those for the rest of the world, according to data compiled by Bloomberg. That’s not to say there aren’t plenty of anecdotes about how companies are having to sharply lift pay and increase benefits to attract workers. But institutional investors know that anecdotes are just that; they don’t represent the broad economy. As Bloomberg News reported this week, the net profit margins for nonfinancial companies in the S&P 500 Index that have announced third-quarter results have expanded 40 basis points to 12.4% from the previous quarter.
It’s fashionable these days among those on the right to warn about an imminent “wage-price spiral” in which higher earnings spark a sustained rise in inflation that damages the economy. Indeed, the Labor Department said Friday that U.S. employment costs rose 1.3% in the third quarter, the most on record going back to 1996. But economists for the last decade or so have bemoaned the low pace of wage gains. So why should anyone be upset now that they are finally starting to accelerate, making up for past shortfalls? Recall that from the end of 2007 to 2019, such costs rose just 0.56% on average, down from 0.87% between 1996 and 2007. The fact that wage growth is starting to pick up is a net positive.
Perhaps stocks are benefiting from the “there is no alternative” — TINA — phenomenon, as record low interest rates make parking money in cash or bonds a losing proposition. But that wouldn’t explain the performance of the dollar, which has appreciated 3.63% this year, already making 2021 the best year for the greenback since 2015 as measured by the Bloomberg Dollar Spot Index. The dollar depreciated in three out of the four years of the Trump administration. A rising currency is a clear sign of international approval of a country’s policies.
Politicians receive too much credit when markets soar and too much blame when they fall. The truth is, too many variables are at work to pin moves in stocks, bonds, currencies and commodities to just one factor. And it’s fair for the opposition to criticize the policies and leadership of those in charge; that is all part of a healthy democracy with plenty of checks and balances. But it should be reassuring to the Biden administration and members of Congress that the collective sentiment of the world’s biggest investors, who have the most at stake financially, suggests the time is right for a big spending package.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is the Executive Editor for Bloomberg Opinion. He is the former global Executive Editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
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