The strong employment data reported last week shows that the U.S. economy is still very much in “soft landing” mode. I wouldn’t be surprised at all if relatively strong economic expansion continues through the end of 2024.
Investors are getting more excited about medium-cap and small-cap stocks, suggesting that more equities will join the rally. Given these points, I’m more confident than ever that we are in a period very similar to the 1994-1999 era, when the economy was strong and the stock market boomed after the Federal Reserve significantly raised interest rates.
The Strong Employment Data Bodes Very Well for Economic Expansion and Stocks
The U.S. added a net, seasonally adjusted, total of 199,000 nonfarm jobs last month, representing a significant increase from the 150,000 positions that were gained in October. Also importantly, “average hourly earnings rose 0.4% month on month, and at an annual rate of 4%,” The Financial Times reported.
Taken together, the data shows American consumers will continue increasing their spending significantly going forward. And since about 70% of the American economy is based on consumer spending, the economy’s outlook is quite strong at this point.
Also, since both the strength of the American economic expansion and consumer spending have a tremendous impact on companies’ bottom lines, U.S. stocks should keep doing very well for the foreseeable future.
Much More Enthusiasm About Small-Cap and Mid-Cap Stocks
In a very positive phenomenon for the stock market, I hear many on the Street becoming enthused about small-cap stocks.
For example, Greg Marcus, managing director at UBS Private Wealth Management. said that ““there’s no question it’s a fantastic time to be diversifying into small- and mid-caps right now,”
And according to Barron’s, “Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, said in a research note this past week that ‘the time is now ‘to get bullish on small-caps.'”
As investors pour much more money into small-cap and mid-cap stocks, confidence toward the overall stock market will increase. That’s because bearish analysts can no longer say, “The stock market is only being held up by seven stocks.”
The stock market will become much less vulnerable to sharp drops brought about by pullbacks in one or more of the Magnificent Seven.
We’re Reliving the ’90s, Not the ’70s
For years, many if not most economists have warned that we’re doomed to repeat the 1970s and early 1980s, when the Fed’s interest rate hikes in the face of high inflation caused the U./S. economy to enter a severe recession.
But I’ve believed all along that this period is much more similar to the 1994-1999 era. In those years, the economy and stocks bounced back strongly from the rate hikes that the Fed implemented in 1994 and early 1995.
In the1970s and early 1980s, the U.S. manufacturing base was collapsing, unemployment was high, there was little innovation by American companies, and the economy suffered a massive energy shock.
Conversely, by 1995, unemployment was relatively low, an innovation/tech boom was starting, most of the manufacturing crash was in the rearview mirror, and energy prices were relatively low.
In 2023, energy prices are relatively low, unemployment is near a record low, the Energy Revolution and the EV Boom are revitalizing America’s manufacturing base, and AI is ushering in another huge technology upswing.
Clearly, the current period is much more similar to the 90s than the 70s, and the November unemployment data underscored that point for me.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
