Unless you have a child in your life under the age of 12, you may not have seen The Emoji Movie that came out a few weeks ago. I have seen the film, and the plot line is thin. The main character is an emoji whose parents are “meh” emojis, which means they don’t feel good or bad about anything, just meh. Think of meh as a verbal shrug of indifference or an expression of apathy. Because the movie is geared toward a younger audience, I allowed my mind to drift and began thinking about how well that sentiment described investor enthusiasm.
Why, after the last 20 months, when stocks have climbed more than 35%, are most investors still not feeling very good about their prospects? Just meh. When asked about the below 5% unemployment figure, investors respond with, “Meh, but where is the wage growth?” If we point out that economic growth has been positive for more than eight years, we hear, “Meh, but the real rate of growth is so far below average at less than 2%.” When we talk about the fact that inflation has remained very low, the response is, “Meh, that’s why interest rates are so low.”
It is possible that instead of feeling so ambivalent about the current environment, we should appreciate the fact that not only have we rallied back from the great recession of 2008/2009, we’re managing to work through a period of great transition between generations and the disruption of the internet economy. Well, at least we’ve almost worked through the first decade of the transition.
In fact, despite the difficulty associated with the transition, the low interest rate environment and the struggle to produce earnings growth, things are better than they seem.
The slow economic growth rate has produced a need for corporations to innovate, maintain low expenses and become more effective at competing globally. When you look at the top 10 global technology companies, more than half of them are based in the U.S. As we transition from baby boomers to millennials, education is important. More than 80% of the top 50 universities in the world are located in the U.S. The slow workforce population growth rate has moved the immigration debate to the forefront of American politics, which suggests that a meaningful resolution to the policy issue may be at hand.
In other words, the slow growth environment has forced everyone to think about how to compete more effectively and deal with issues that have been holding economic progress back. While the debate may be difficult, at least we are having it, which suggests resolution may be near.
Fiscal and monetary policy makers can only make adjustments to the economy in an attempt to smooth out the structural effect of workforce population growth and productivity. They can’t alter the structure itself. For example, policy makers can’t substantially alter the population growth rate. They can create policies that make it more or less attractive to have families or immigration policy that allows the population to grow more or less quickly, but they can’t change the fact that we’re between two generations of more than 70 million people each (boomers and millennials) whose activities control how and where the economy grows.
The fact that interest rates have been and remain very low has also had some beneficial effect on the economy. The low cost of debt has allowed many companies to alter their capital structure by issuing debt to buy back stock, reducing the capital stock outstanding and lifting asset prices. Some may see this as a negative, but the structure of capitalism is to allocate capital in a way that promotes growth and efficiency, i.e., profitability. When a reasonable rate of return on capital isn’t available to corporate managers, they should reduce the amount of capital outstanding. This reduction has allowed stock prices to rise as profits are spread across a smaller equity capital base. As the economy improves, companies begin to take risk again and use the low cost of debt to invest in themselves rather than reduce the capital stock. We’ve seen this in the last two quarters—corporate revenue and profitability growth are the best they’ve been since 2011. Stock prices are rising now due to the improvement in corporate fundamentals.
The main character in The Emoji Movie was troubled by having to show only one emotion—meh. He wanted to feel better about his prospects for the future and perhaps we should too because the transition through our slow growth, low inflation environment may prove to have long-term benefits.