If we can say that one man launched the philosophy of conservatism as we know it today, that man must be Scottish economist Adam Smith, whose ground-breaking text The Wealth of Nations set the standards for capitalism as we know it over the past three centuries.
Smith explained the value of capital, markets, investments, and returns at a time when riches were almost universally tied to land ownership, few people used notes as currency, and the closest things to banks were goldsmith guilds with impressive vaults who would safeguard precious metal for a fee.
Smith’s most famous quote — “it is not from the benevolence of the baker, butcher, and brewer that we expect our dinner, but from their own self-interest” — has been a mantra for industry and self-reliance ever since.
This great philosophy of the Enlightenment is shining through to our society anew after a decade of Democratic Party bailouts, taxes, welfare rolls, regulation, and deficit busters. The evidence is not in butcheries and bakeries, however, but at the other end of the socio-economic spectrum, where President Trump’s election has led to a rebound in the luxury goods market, a key indicator of economic health.
In one area, luxury cars, sales are up by nearly 20% in the first quarter of 2017 compared to the 3rd quarter of 2016 before the election. If the fortunes of Bentleys and Maseratis (or Hermes handbags or Chanel perfume) seem too far away or too inconsequential to merit your attention, consider that luxury spending by upper-income customers rarely fluctuates according to business cycles. As such, the new demand and new customers are coming from an emerging middle and upper-middle class.
A few statistics on luxury cars can illustrate this upward mobility, achieving in a few months of Republican confidence what could not be achieved in years of Democratic redistribution. The American auto industry experienced no growth in the three months prior to the election — a time when, if you recall, the media predicted a landslide win for Clinton — but has seen record sales since, including the best single-year total sales volume level in history for 2016 at just over seventeen and a half million vehicles.
Luxury cars play a not insignificant part of that growth, including Rolls Royce’s staggering 42% sales growth from the last month of 2016 to the first month of 2017. Even our competitors are benefiting: Volkswagen broke their trend of monthly sales loss since 2015, originally due to their emissions scandal.
Growth in the auto industry, the luxury industry, in real estate spending, and in other slow-growth sectors of the economy reflect an increased confidence born by the intertwined growth of Trump’s popularity and the stock market.
In case you’ve not heard, the Dow Jones has pushed over 20,000 for the first time in history in a “Trump rally” that also tied a record for the shortest period of time for a growth tick of 1000 points. The Dow has now set no less than 32 different record highs, suggesting an upward bound macro trend that could potentially push GDP growth above 2% for the first time since 2006.
Optimism in Trump alone, however, will not grow stock value further or sell more Lambourghinis. While Trump has promised a bevy of new spending, including boosting the military budget by some fifty billion dollars on top of an infrastructure bill of about one trillion dollars, consumer spending needs to continue to follow suit.
Given that the S+P 500 is currently trading at nearly eighteen times the value of projected earnings, the highest rate since 2004, some economists are predicting letdowns (the historical ratio of about 15.5 times the value of PE suggests this as well).
This does not mean economic doom and liberal rejoicing. Trump’s plan to re-write the corporate tax code, which Ted Cruz frequently reminds us has more words than the Bible, has huge potential benefit for our corporations and their investors.
The stock market cannot grow upwards forever. What goes up must face corrections, whether it is shares of Porsche or shares of Wal-Mart.
However, investors in the meantime should look to luxury spending growth as an arbiter of overall consumer spending. As the butchers and bakers re-plan their budgets to account for car payments on a BMW, investors should re-plan their holdings to capitalize on rare strong growth in these sectors of the market.
Regards,
Ethan Warrick
Editor
Wealth Authority
