Recency bias is causing many investors and economists to believe we are in a new era of uncertainty because of the dot com bubble and the 2008 financial crisis. It’s like saying inflation would always stay high after the bout of inflation caused by monetary policy mistakes in the late 1970s and early 1980s. Analyze the current situation and make predictions based on the updated fundamentals. You can’t use a past template for future results when so much has changed.

One big difference in the economy which may make it more stable is its diversification. The influence the top stocks have on the overall market is often discussed, but it’s rare to see analysis on the historical change in the economic share of each industry. As you can see from the chart below, the manufacturing sector dominated in the 1940s and 1950s. 

Source: Twitter @cullenroche

While it’s common to hear fears about the demise of manufacturing, we don’t hear about how each industry is more equal which means the overall economy is able to deal with weakness in one industry more easily. It’s a great talking point to say America doesn’t make anything anymore because it spreads fear, but improvement in other industries means shocks in an industry won’t cause the economy to spiral into a recession. It’s easy to see this lack of diversification play out in emerging markets which often have a large portion of the economy tied to natural resource exports. The best recent example of the American economy avoiding a recession because it is diversified is the weakness in manufacturing and oil prices from late 2014 to early 2016 not causing the economy to crash like it did in Brazil and Russia.

Conference Board Shows Extreme Optimism

The August Conference Board consumer confidence report was a shocker in many ways. Firstly, it was the best report since October 2000 which was the height of the tech bubble. The composite reading was 133.4 which beat the highest estimate by a lot as it was only 128. Secondly, it differed sharply from the University of Michigan August preliminary consumer confidence survey. The Michigan expectations index was flat and the current reading fell 5.8% month over month. The Conference Board index was much more optimistic as the Present index was up from 166.1 to 172.2 and the Expectations index increased from 102.4 to 107.6. Both surveys show the present index is higher than the future as the expansion is going well, but is near its end.