Economy Expands Despite Oil Shock; Stocks Outperform Oil

U.S. Economy Shows Resilience Amidst Global Headwinds

The United States economy continues to expand despite recent spikes in energy prices and widespread market anxiety. Recent data from S&P Global showed the Composite Index remaining above 50, a key indicator for growth territory. Manufacturing activity, including new orders, also saw an increase. While input prices rose due to temporary effects from oil prices nearing $100 a barrel, analysts suggest this will not lead to a significant, lasting surge in inflation.

Inflation Concerns Eased by Money Supply Data

A key factor easing inflation fears is the growth rate of the M2 money supply, which is currently around 3.5%. This figure is well below its historical average and significantly lower than the nearly 30% jump seen during the Biden years. That earlier surge in money supply is linked to cumulative inflation exceeding 20% during that period. Experts believe the current money supply growth rate makes a major, persistent inflation spike unlikely.

Stock Market Offers Attractive Alternative to Oil

The stock market has shown resilience, with major indices down only a few percentage points. Corporate profits remain strong, suggesting a healthy underlying business environment. In light of these trends, investors are advised to consider shifting away from oil investments and instead focus on equities. Buying into broad market index funds and holding them for the long term, potentially decades, is presented as a sound strategy.

Technological Advancements Drive Future Growth

Productivity is surging, trending around 2.5%, which is considered a strong number. This growth is fueled by a technological revolution encompassing artificial intelligence (AI) and quantum computing. These high-tech advancements are expected to be major drivers of economic expansion for many years to come.

Labor Market Stable Amidst Other Economic Strengths

While the labor market may not be experiencing explosive growth, it remains stable. Weekly unemployment claims are at historic lows, and the unemployment rate stands at 4.4%. Business investment is robust, with factory construction booming. Wages continue to rise faster than prices, and consumer spending remains strong. Tax rebates and cuts in the first quarter appear to be offsetting the impact of higher gasoline prices.

First Quarter GDP Tracking at 2%

The Atlanta Federal Reserve’s GDP Now forecast for the first quarter tracks at approximately 2%. While not exceptional, this growth rate is considered solid given the challenges posed by energy prices and ongoing global conflicts.

Policy Tailwinds Expected to Persist

The economic policies enacted during the Trump administration, including significant tax cuts and deregulation, are expected to provide continued support. The focus on increasing domestic energy production, often summarized as “Drill, Baby, Drill,” is also seen as a positive factor for the post-war economic period. Furthermore, geopolitical developments aimed at countering radical Islamic extremism are believed to be positively influencing stability and economic freedom in the Middle East and globally.

Market Impact

The current economic environment presents a mixed picture. While energy prices create temporary inflationary pressure, underlying economic data suggests resilience. The low growth in M2 money supply is a crucial indicator that sustained high inflation may be avoided. This backdrop makes the stock market, particularly broad index funds, an attractive long-term investment compared to volatile oil prices. The ongoing technological revolution in AI and computing signals significant future growth potential.

What Investors Should Know

Investors should carefully assess the current market conditions. The strong corporate profits and low unemployment, coupled with moderating money supply growth, suggest that the economy is on a stable, albeit not spectacular, growth path. The potential for long-term growth driven by technological innovation should not be overlooked. While short-term volatility in oil prices is a concern, the broader investment case for equities, especially those held for extended periods, appears favorable. It is important to remember that past performance is not indicative of future results, and all investments carry risk.

Source: Larry Kudlow: Investors should STAY OUT of this (YouTube)