Markets may tremble, but the economy’s all about confidence

The year 2018 was one that Wall Street may want to forget, but Main Street can look back on it with some pride. Wall Street (the financial markets) had a rough year. Most global equity indexes had negative returns for the year. But Main Street—otherwise known as the U.S. economy and the businesses that comprise it—had quite a bit to brag about in 2018 and in the fourth quarter.

U.S. consumers pushing the economy forward

“The turbulent stock markets in the last 3 months of 2018 really overlooked the robust U.S. economy,” says Bob Baur, chief global economist for Principal Global Investors. “One of the big positives for the U.S. economy is consumer confidence, which has been relatively unaffected by the market volatility.”

And the U.S. job market has shown why consumers feel pretty good: Companies are adding jobs—about 214,000 per month during 2018.1 That means more people working and earning money. And those jobs were spread across the economy, with 70% of industries showing increases.2 So growth isn’t fueled by just 1 or 2 industries that might slow down and bring the growth to a halt.

People are also making more money on average. “Compared to December 2017, the average amount that employees earned per hour in December 2018 is 3.2% higher,”3 Baur says. With more people working and employees earning more on average, it’s easy to see why consumers have stayed positive.

Graphic of a quote from Bob Baur stating that compared to December 2017, the average amount that employees earned per hour in December 2018 is 3.2% higher.

Optimistic shoppers

You don’t have to look any further than the holiday shopping season to see proof. When economists want a sense of how well retail companies are doing, they look at a measure called “same-store sales.” That’s a number that evaluates the sales from stores that have been open for a year or more. Why a year or more? Because then you’re able to ignore the effects of new stores opening and just focus on how well-established stores have been doing.

“Same-store sales were up 9.3% above the prior year for the week of December 29,”4 Baur says. “Not only is it a record high, it’s almost unheard of to see that type of year-over-year growth.” When same-store sales are that high, it means consumers have been spending more this holiday season than last—a lot more.

What about businesses?

Big companies aren’t as optimistic as consumers. The recent stock market drops and trade tensions with China have dented the confidence of some large-company executives. That dent is something economists will watch in 2019, particularly how it affects spending. When big businesses expand, they spend money on inventory, machinery, and infrastructure. Even though businesses have done well in 2018, their managers are getting more pessimistic, which means they might scale back on spending.

Graphic stating that over 99% of U.S. employers are small businesses and about 64% of new private-sector jobs come from small businesses. And small businesses are still optimistic.

“I’d say big businesses are a bit more cautious than consumers,” Baur says. “They saw solid profits in 2018, and while their capital spending might not be as great as the last couple years, it should still be positive.”

Small businesses, however, don’t seem to be as gloomy, and that might matter more. This is definitely Main Street. Over 99% of U.S. employers are small businesses, and about 64% of new private-sector jobs come from small businesses.5 And they’re still optimistic. In surveys, small business owners talk about their unfilled jobs and a lack of qualified applicants.6 That’s a good thing. It means that small businesses want to expand and grow, but just need to find the right resources. It’s like when you’ve finally saved up enough to remodel your kitchen, but you can’t find a contractor to do the work because they’re all so busy.

What can you do?

Look past the headlines.

Big companies are always in the news—because they’re big companies. But remember that small businesses are doing well, and they make up a lot of the economy. Their successes just might not make the evening news. You can always check in with investing news on to find out more about market developments and understand how the markets could affect your retirement savings.

Check your mix of big and small companies.

In your investment portfolio, big companies equate to “large-cap” stocks. Smaller companies, with more local and regional focus, will show up as “small-cap” companies. Log in and look at your investment statement to see what your balance between large and small is.

Keep cool.

If market volatility shakes your confidence, here are some tips for staying calm when markets don’t.

1,2,3 Source: U.S. Bureau of Labor Statistics

4 Source: Johnson Redbook. Year-over-year, same-store-sales for the week of December 29.

5 SBA Office of Advocacy.

6 NFIB December 2018 Small Business Optimism Index.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

The commentary represents the opinions of Principal Global Investors. It should not be considered investment advice. No forecast based on the opinions expressed can be guaranteed and may be subject to change without notice. No investment strategy, such as diversification, can guarantee profit or protect against loss.

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