Peak Optimism, Not Peak Stocks or Economy

A Bloomberg article recently joined the chorus of stock market naysayers with a specious claim that the current record optimism displayed by Small Business surveys signaled that a market correction was due. Panics can occur almost anytime, but this theory lacks real evidence as have most clarion calls for a bear market the past several years.

Contrarianism has a place in forecasting, but evidence indicates the only logical conclusion from the recent business surveys should be positive for stocks, jobs, and the economy. After a decade of small business pessimism, the current surge in optimism over improving earnings and a record consensus that this is an ideal time to expand should assuage fears of a quick end to this economic growth phase that has finally found firm footing.

The corporate tax cut inspired spike in earnings is impressive, but normally we witness a few years of elevated earnings optimism before the growth phase cools significantly.

With production levels far below customer demand this past year, an ensuing shortage of employees and record tightness in the supply chain is extending this recovery and providing record confidence for businesses to increase output capacity.

Digital black swan flash crashes of 20-40% in equities during ongoing economic growth phases occur almost every decade (1987/1998/2011), thus we are always mindful of warning signs of risk. Historically, optimism surges out of the economic doldrums, followed by several years of expansion before we reach the final innings of the ballgame. 2017 and 2018 mark the middle innings of the current baseball metaphor. Investors should be patient awaiting signs of overheating and overbuilding of future capacity to overcome today’s severe shortages before hitting the panic button to sell longer term.

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