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Venturing a bit off the beaten path, I’m writing this letter in Bigfork, Montana. We have a satellite office here and I came up for a long weekend to visit some folks and take in the scenery. It’s very peaceful up here and it’s nice to get away from all of the feuding, bickering, one-upmanship, name-calling and so forth, but enough about college football.

Corporate America and U.S. equity markets had an impressive past 3 months with stocks making solid gains on the heels of continued strong earnings. The International markets didn’t fare as well. Daily, we are bombarded with so much negativity, but the underlying facts tell a different story. So, without opinion, conjecture, feelings, fake news, etc., I will highlight a few important “facts” that are the driving forces behind our economy and markets.

Consumer spending, which represents just over two thirds of our nation’s economic activity, has been the biggest factor behind the improved economic growth. GDP gained 4.2% in the 2nd quarter and estimates are for near 4% gains for this previous 3rd quarter. The last time the U.S. had even a 3% yearly gain was in 2005, so the current numbers are all the more impressive. Household net worth has reached an all-time high and the median household income is on pace to break 2017’s record of $61,372. For the first time, the average national credit score has reached 704, according to FICO and the poverty rate also fell for the third consecutive year. Furthermore, Wal-Mart’s same- store sales rose by 4.5%, which the company said was “the strongest growth in more than 10 years”. Target’s CEO Brian Cornell said that this consumer environment “is perhaps the strongest I’ve seen in my career”. Not surprisingly, the consumer confidence index is at an 18-year high.

Consumer spending has had the good fortune of being supported by strong labor markets. Employment growth has been robust this year with payrolls averaging over 200,000 net new jobs per month. The unemployment rate stands at 3.9%. Manufacturing jobs which had been proclaimed as “never coming back” have staged a revival indicated by the Institute of Supply Management’s manufacturing index jumping to a 14-year high. Manufacturing job growth has averaged 26,000 workers per month in 2018. Importantly, total wage income is growing at an annualized pace of roughly 5%, comfortably above the inflation rate.

With employment strong and consumers doing well, these forces, combined with a much more competitive tax structure, have U.S. corporate profitability at an all-time high. Earnings have risen in the 20% range for the past several quarters and top-line revenue growth is coming off a 10% quarterly gain. U.S. executives have become more upbeat with roughly 80% of companies raising forecasts. Along with the higher profits and increased guidance has come more hiring and higher pay for existing employees. This, in turn, leads to stronger consumer spending which leads to an overall stronger economy. So, for now anyway, U.S. capitalism is alive and functioning very well.

As we enter the final quarter of the year, though the political environment in this country is extremely divisive, two underlying support pillars remain in place: strong economic data and robust corporate earnings. Over the next few months, we are likely to see a tug-of-war between these two positive fundamentals and the negative factors of divisive politics, geopolitical risks, and higher interest rates. As for now, the economy remains strong and U.S. corporations are in great shape

Sincerely, Clay Parker

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