In the months following the election, we saw optimism surge higher in a number of prominent indicators…

• Homebuilder sentiment hit an 11-year high.
• Small Business optimism hit a 12-year high.
• Consumer confidence hit a 13-year high.
• Philadelphia Fed Manufacturing survey hit a 33-year high.

The thinking was as follows: a new era of higher economic growth was about to take hold, driven by lower taxes, deregulation and massive infrastructure spending. It was said that 5% real GDP, a stronger U.S. dollar, higher long-term interest rates, and higher wage growth were coming.

Reinforcing this belief was the booming stock market in the U.S., hitting new all-time highs on a daily basis and doing so with just about the lowest volatility in history.

Fast forward to today and the stock market continues to hit all-time highs with record-low volatility, but something interesting is developing with respect to the aforementioned levels of optimism. They are starting to move back down…

• Small Business optimism has moved down to its lowest level since last November.

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• Consumer Confidence has moved down to its lowest level since last October.

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• Philly Fed Manufacturing Survey has moved down to its lowest level since last November.

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But these are just surveys. Perhaps the real economic data is painting a different picture. Let’s take a look…

• In the first quarter, Real GDP came in at 1.4%. In the second quarter the Atlanta Fed is projecting 2.5%. The average of the two, 1.95%, is below the expansion average of 2.2%.
• In the first six months of the year, the U.S. added an average of 180,000 jobs per month (non-farm payroll report). In the prior five years, the U.S. added an average of 214,000 jobs per month.
• In the first six months of the year, U.S. Retail Sales rose at an average pace of .07% per month. Over the prior five years, the average rate of growth was 0.29% per month.
• In the first five months of the year, Real Personal Income grew at an annualized rate or 1.89% per year. Over the prior five years, it grew at an average rate of 2.28%.

Based on the data, it would be hard to argue that economic growth is improving, and certainly not supporting the belief that 5% real growth is attainable anytime soon. If anything, growth appears to be slowing down just a bit.

Meanwhile, the U.S. Dollar Index is at a 52-week low, down against every major currency in 2017.

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And long-term bond yield have fallen in 2017 while the yield curve (10-year minus 3-month yields) is close to its flattest level of the expansion. The bond market certainly is not buying into a move to 3% real growth, let alone 5%. 

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But we still have the stock market, hitting new all-time highs on a daily basis with no volatility to speak of. In contrast to the economic surveys, sentiment there has certainly not waned. Is this a signal that 5% growth may indeed be coming? Only if you believe the stock market is the economy.

In recent weeks, the President has suggested as much. Mr. Trump, who called the entire stock market advance under President Obama a “big, fat, ugly, bubble,” has been touting it as a barometer of success…

It would be an understatement to say that there has been no President in history who has mentioned the stock market with greater frequency. This is interesting, for if the stock market is said to be a real-time reflection of his performance, what will the President say when it actually goes down (there hasn’t been a 5% correction since he was elected, one of the longest stretches in history)?

As most market participants understand, the President and their policies have very little influence stock returns. There are a multitude of factors that drive the stock market (earnings, valuation, sentiment, economy, etc.), and the President is just one microscopic piece of that puzzle. This is as it should be in a free market economy, where no one person has undue influence.

Considering the growing divide between the stock market and the real economy, the question for investors is whether they still believe the post-election narrative to be true. Will the dream of 5% growth be realized and do they take Trump at his word when he says: “we’ve signed more bills – and I’m talking about through the legislature – than any President, ever?”

Rational optimism is a very good default mindset to have and has served me well throughout the years. But there’s a time when optimism reaches a point that is simply not supported by the data, and some skepticism is warranted. The homebuilder/consumer/housing/manufacturing surveys seem to be slowly coming back to reality.

Will the stock market be next?