Pardon me while I channel my inner Michael Scott, but as I sit down to write this week’s Perspective, I can’t help imagining myself sneaking into the cafeteria here at Empower and hanging up a 1990s-era Successories poster extolling the virtues of self-confidence — a move utterly characteristic of the fictional Mr. Scott. (For those who may not remember, Successories was a mall-based chain whose biggest claim-to-fame was selling those “Hang In There!” kitten posters and similar motivational kitsch. And for those who don’t remember Michael Scott, you should take the afternoon off and go watch a few reruns of The Office.)

The reason for my imagined and illicit motivational poster hanging is that big displays of confidence were literally everywhere in last week’s news. Consider the massive self-confidence that South Korean President Yoon Suk Yeol had to possess to be able to pick up the phone and tell his armed forces to lockdown the country for little more than his own desire to make his country’s parliament more amenable to his wishes. Or French President Emmauel Macron, who confidently declared snap elections last summer expecting his government to prevail, only to see his Prime Minister ousted in, ironically, a no-confidence vote last week (thereby toppling the French government through democratic means for the first time since the early 1960s.)

These were impressive displays of political self-confidence for sure. But they pale next to the confidence displayed by investors, who sent the Korea Composite Stock Price Index (KOSPI)  down a mere 1.1% last week – a level that might feel almost heroically bold given that tanks and troops were actually deployed in the streets, even if you allow for the fact that the bizarre incident lasted for only a few hours before the country’s parliament voted unanimously to end it. And in the case of France, the CAC40 actually rose 2.8% in spite of the tipping over of its government for the first time in decades.

Maybe this isn’t surprising. After all, we’ve long held that political (and geopolitical) risks are often a sideshow for markets unless they strike at an existing economic vulnerability, which arguably neither of these events did. But the “confidence is everything” theme extends well beyond the geopolitical realm as well. For example, investors also sent Bitcoin above the $100,000 mark for the first time in its history. The reasoning? President-elect Donald Trump’s decision to name a cryptocurrency proponent to head the Securities and Exchange Commission, which supporters confidently believe will set a crypto-friendly tone for the entirety of Trump’s next term.

It’s getting harder and harder to ignore the growing confidence of investors in more mundane areas of the market, too: Both the Nasdaq Composite and the S&P 500 Index inked new all-time highs last week, for about the umpteenth time this year. Whether this reflects confidence about the consumer, confidence about corporate earnings, or simply confidence in the sustained confidence of other investors (which I suppose is just another way to say, “fear of missing out” – or something that at least rhymes with ‘FOMO’,) is an open question. But the unmistakable perfume of confidence was no less undeniable for it.

Confidence was on full display in last week’s economic releases, too. The best example came from Friday’s non-farm payrolls release, which showed that U.S. businesses were confident enough to create 227,000 new jobs last month.¹ Well, that’s not exactly true, because at least a portion of those new jobs reflected the re-entry of some 40,000 Boeing workers who walked back in to work after being on strike for nearly two months. But even allowing for that tailwind the payrolls figure was still better than expected, which reassured at least some investors that last summer’s labor market queasiness might have been just that — a  little tummy ache and not the full-blown stomach flu that it once appeared might be coming. And while we’re talking about confidence in the labor market, the so-called quits rate – which reflects the percentage of the U.S. workforce who is confident enough about their ability to find a new job to walk out on the one they have – ticked slightly higher in October, according to last Tuesday’s Job Openings and Labor Turnover Survey (JOLTS) release from the Bureau of Labor Statistics.² While the quits rate is still low enough to create at least a little concern, it’s perhaps as direct a read into the mind of the U.S. wage-earners as you’ll find anywhere; If it is beginning to stabilize, it’s a clear positive for the economy.

Had enough? Well, we’re not quite done. Last week’s purchasing managers’ indices (PMI) said pretty much the same thing they’ve been saying for months: the manufacturing sector is contracting, but the services sector is still more than able to pick up the slack. But all four PMI reports (two covering the manufacturing sector and two covering services went out of their way to point out that a growing sense of confidence among managers in both sectors is palpable, at least in part because all the uncertainty related to last month’s election is finally gone.^3,4,5,6 And one more before we move on: The University of Michigan’s mid-month read on consumer sentiment showed a noticeable uptick, reflecting growing confidence about the current state of the economy as reflected in consumers’ plans to purchase big-ticket items in the near future.⁷

If there was one place in all this where self-confidence was at least a little less-than-evident, it was in the Federal Reserve’s (the Fed) latest edition of the Beige Book – a collection of economic anecdotes from around the Fed’s various districts.⁸ As expected, the Beige Book was an impressive study in how many ways to say “meh,” with words like “modestly” and “moderately” used alternatively to describe a slow expansion in the various regional economies covered by the book. But for those keeping score at home, the clear winner in this edition of Beige Book Bingo was the word “slightly,” which was used by no fewer than five of the Fed’s 12 districts to describe the pace of local economic growth.

But even that lukewarm description of the economy had a confidence-building caveat: Federal Reserve chair Jerome Powell, who reportedly reads the Beige Book carefully, later expressed his own confidence by telling an audience of economists that he “feels very good about where the economy is,” and that “we can afford to be a little more cautious as we try to find neutral.” Notably, that last comment did little to dent the confidence of traders, who are still around 85% confident that the Fed will announce another quarter-point cut when it meets in about a week and a half.⁹

But here’s the “but” (in economics, there’s always a “but,” and sometimes it’s a big one): As great as all this confidence feels, there is still enough room to question it. For example, those better-than-expected payroll gains still have a noticeably non-cyclical tilt, and the aggregate number of new jobs created wasn’t enough to rescue the overall unemployment rate, which ticked up 0.1% to 4.2%. Meanwhile, actual hiring remains curiously low even if the number of job openings reported is growing again (a phenomenon backed up by last week’s Challenger Gray and Christmas’ layoff report, which reiterated once again that actual hiring plans remain as low as they’ve been since at least 2015).¹⁰ And those upbeat PMI reports — the ones that celebrated a post-election uptick in confidence in both services and manufacturing — also cautioned that “demand needs to improve alongside the improvement in confidence” before the signal to higher growth can be deemed reliable.

Moreover, the increase in consumer sentiment noted by UMich above reflected not so much a willingness to run out and buy a new washer –and dryer because the economy is suddenly booming, but instead something closer to panic buying: “Rather than a sign of strength, this...was primarily due to a perception that purchasing durables now would enable buyers to avoid future price increases.”

Don’t get me wrong, I’m as happy as the next guy that we seem to be ending 2024 on a confident note, and I hope it persists. But experience has taught me to question consensus most closely when it’s so close to universally held. After all, it might be true that “with confidence you have won before you have started,” but only the truly over-confident would entirely ignore the words of philosopher/point guard Kobe Bryant who said, “confidence only comes from preparation.” Let’s hope that markets and the economy have put in the work necessary to justify this sudden outbreak of good vibes.

What to watch this week

Wednesday’s read on consumer prices (Consumer Price Index or CPI) and Thursday’s look at producer prices (Producer Price Index or PPI) will probably rank as the most significant items on this week’s economic calendar. I still think we’ve reached a point in this cycle that it would take a meaningful surprise on either side of estimates to generate much in the way of market reaction, but stubborn little hints of inflation continue to dot the current release schedule with troubling regularity. That includes last week’s above-mentioned services Purchasing Managers Indices from S&P global, which noted that “input costs continued to rise sharply”, reflecting higher wages and transport costs. Until these troubling nits fade entirely away, it will pay to remain vigilant for signs of an unwelcome reacceleration in prices, because the Fed certainly will.

Next on the list is a small smattering of earnings reports. Last week’s results from deep discount chains Dollar Tree and Dollar General did little to change the narrative surrounding middle- and low-income consumers, and this week’s results from Costco and Game Stop – the original meme stock – might show the same for other consumer cohorts. Elsewhere across the sectorscape, Oracle, Broadcom, and Adobe will each have an opportunity to convince investors that they, too, might be able to leverage AI into something valuable and cool.

From a sentiment perspective, watch Tuesday’s release from the National Federation of Independent Businesses for a read into how small businesses are viewing an end to Fed tightening and election-related uncertainty. Small businesses represent a significant portion of economic activity and hiring, which gives the segment significant economic clout. At a minimum, Tuesday’s release might help justify a small surge in smaller stocks, which have outperformed large caps by around 200 basis points since October.

Finally, under the heading of “watch this space,” we’ll get import and export prices on Friday. Ordinarily, this release is relevant only insofar as it provides context around current and future inflation, but with the threat of significant tariff activity by the incoming administration looming as soon as January, this week’s EXIM data might ultimately serve as a baseline against which the impacts of trade policy can be measured.