The Economy Is Increasingly Disjointed. That’s Better News Than It Sounds.
Right now, the U.S. economy is a decidedly mixed bag. For investors, that could be good news.
It can be hard to know what to make of the U.S. economy. Inflation remains steadily high. A number of recession indicators, like an inverted yield curve and weak consumer confidence, suggest a recession could be looming ahead. On the other hand, GDP growth and corporate profits remain solid.
One explanation, according to economic researcher Jim Paulsen, is that different sectors of the U.S. economy that have traditionally marched in lock-step are no longer quite so interconnected.
“During much of the post-war era, the U.S. was an industrial economy which rose and fell in concert,” he writes in a recent note. “But today, U.S. economic diversity is much broader and old tried and true recession indicators simply cannot capture an economy increasingly driven by uncorrelated sectors.”
To drive the point home he cites the Bloomberg U.S. Economic Surprise Index, which measures how closely economic data points turn out to match analysts’ forecasts. Paulsen notes that there have recently been upside surprises in two of the economy’s big sectors: personal and household and the labor market. At the same time, results from a third, retail and wholesale, have been mostly as expected. There have been a spate of negative surprises in the real estate and industrial sectors.
While that makes it hard to generalize about the U.S. economic situation, it’s actually good news, he says. It suggests the U.S. economy has become more diversified, not unlike a well-balanced stock-and-bond portfolio. As long as strength in some parts of the economy can balance out weakness in others, it increases the chances the economy will continue to grow, if more moderately, as inflation ticks down.
“Embrace economic diversity, enjoy a low GDP correlation, welcome the coming soft landing,” Paulsen writes.
The lessons or investors? The first is to stay invested, despite some scary-seeming omens like the inverted yield curve. That might seem obvious, but with near-record levels of cash still on the sidelines, it bears repeating.
The other? Don’t give up on out-of-fashion sectors like small caps or consumer discretionary stocks. Both have struggled in the current environment of elevated interest rates and weak consumer confidence. Sooner or later, these dynamics are likely to shift—and being ready to take advantage of that could help smooth out declines in other parts of your portfolio.
Write to Ian Salisbury at [email protected]