I’ve always been a huge fan of Star Trek, especially the original television series. One of my favorite episodes is “Mirror, Mirror,” first broadcast in 1967.

The episode involves a transporter malfunction that swaps Captain Kirk, Mr. Spock, and the rest of the crew with their evil counterparts from a parallel universe. (The goatee-wearing “Evil Spock” has become a legendary cultural trope.)

Many Americans, including investors, seem to be living in a mirror universe.

The latest U.S. economic numbers are strong, with gross domestic product (GDP) growth expanding and the personal consumption expenditures index (PCE) falling. The unemployment rate stands at 4.1%, the lowest since 1969. Second-quarter 2024 corporate earnings for the S&P 500 are expected to post year-over-year growth of roughly 10%.

We’re witnessing the coveted “soft landing” for the economy, with a stock market hovering at record highs. But many of my fellow Americans continue to live in a parallel universe in which everything is…evil.

It’s simply not true. Let’s start with economic growth. The U.S. Bureau of Economic Analysis (BEA) reported Thursday that U.S. GDP grew 2.8% on a year-over-year basis in the second quarter, handily beating economists’ forecasts of 2.1% growth. Consumer spending helped drive the GDP growth number higher, as did rising private inventory investment and nonresidential fixed investment.

There also was good news this week on the inflation front, first on Thursday and then again on Friday.

The BEA reported Thursday that the personal consumption expenditures price index (PCE), a key metric closely watched by the Federal Reserve, increased 2.6% for the quarter, down from its 3.4% move in Q1. Excluding food and energy, “core” PCE prices were up 2.9%, compared to a 3.7% increase in the previous period.

More empirical encouragement arrived on Friday, when the BEA reported that the PCE increased 0.1% in June and was up 2.5% from a year ago, in line with expectations, with the annual rate declining from the previous month (see chart).

Friday’s core PCE data showed a monthly increase of 0.2% and 2.6% on the year, both also in line with expectations. Personal income rose just 0.2%, below the 0.4% estimate. Spending climbed 0.3%, meeting the forecast, while the personal savings rate decreased to 3.4%.

And yet, the latest polls still show that a majority of Americans think the economy is terrible and inflation is running rampant. I’ve remarked on this disconnect in previous columns, but the point bears repeating because these misperceptions just won’t go away. It doesn’t help that the two main political parties in America live in their own separate realities.

Boldly go…

Here’s the universe in which to make investment decisions: economic growth is healthy, inflation is falling, unemployment is low, corporate earnings are robust, and the central bank is on the verge of cutting rates.

In this bullish environment, you should consider the following:

Sector Rotation. The Dow Jones Industrial Average in recent days has been outpacing the S&P 500 and NASDAQ, signaling sector rotation toward cyclical plays. Industrials and financials typically perform well in a strong economy. Industrial companies benefit from increased production and infrastructure spending, while financials gain from higher loan demand and lower default rates.

Corporate Bonds. With robust corporate earnings, investment-grade bonds from financially strong companies offer a good balance of risk and return. If you’re willing to take on more risk, high-yield bonds can provide higher returns, benefiting from improving corporate financial health and lower default rates.

Commodities. Metals such as copper and aluminum often see increased demand as industrial activity ramps up. Strong economic growth also drives energy consumption, supporting crude oil prices and benefiting energy companies.

International Markets. Emerging markets often outperform in global economic expansions due to their higher growth rates and improving economic fundamentals. I’m particularly keen on Latin America, an underrated growth story for the second half of 2024.

The main U.S. stock market indices soared on Friday, driven higher by the aforementioned economic data. The indices finished the trading session as follows:

• DJIA: +1.64%
• S&P 500: +1.11%
• NASDAQ: +1.03%
• Russell 2000: +1.67%

For the week, the Dow and small-cap Russell 2000 notched gains; the S&P 500 and NASDAQ lost ground. This divergence follows the sector rotation theme.

The benchmark 30-year U.S. Treasury yield fell 0.98% to settle at 4.45%. The CBOE Volatility Index (VIX), the so-called “fear gauge,” plunged more than 11% to 16.37, a sign that fear and stress are dissipating from the markets.

In the universe that I occupy, positive data abounds. Invest accordingly.

Read This Article: Pot Stocks on the Brink of Election Year Boom

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