The Weight of the Evidence 2024 – Q1

The Weight of the Evidence

TLA continuously researches and monitors economic and market trends on behalf of the families we serve. Let’s start with the crosscurrents we see in the economy.

Cross Currents:

On the positive side of the ledger, November marked the 24th consecutive month with an unemployment rate under 4%, which has resulted in real (after inflation) consumer spending on the rise.
At the same time, in many markets, low home inventory has meant that middle-and low-income households have been priced out of home ownership, which has meant skyrocketing rents. Now relief may be in sight for renters as rents nationwide have only risen at a 1.2% annual rate over the past 6 months, significantly less than wages. And the supply of new multi-family housing is on the rise.

During the Covid lockdowns, people sat at home in front of their computers and bought “stuff.” Lots of stuff. It was almost a form of entertainment. While the purchases of goods have slowed, Americans today are buying more services. The service sector of our economy remains quite strong with 15 of the 18 major service industries reporting growth.

Contrary to the plethora of predictions that the economy would be in recession by the second half of 2023 due to the Fed’s relentless increase in rates from .25% to 5.5%, third-quarter GDP actually rose by a remarkable 5.2% in the third quarter.

Finally, a bright spot that gets little attention- The U.S. now accounts for the most oil production in the world, making Americans less dependent on Russian and Middle Eastern supplies. Good news given the obvious tensions in those two parts of the world.

Crosscurrents mean that all is not rosy. Historically, most economic disruptions come from excesses and we certainly have a few- government spending, consumer debt, housing affordability, and speculative investing, to name a few.

Middle- and lower-income households, which tend to spend more of their income on basics like food, shelter, and clothing, have been squeezed given the resumption of student loan payments, higher credit card rates, and tighter lending standards. Credit card debt has been growing faster than the economy and that is likely unsustainable. Home building and home buying, along with consumer durables, like furniture and appliances, are likely to be constrained by weak demographics and higher mortgage rates. Tighter lending standards have not only affected consumers. Corporate bankruptcies have risen in 2023.

Last, but not least, the good news in the low unemployment numbers does mean that businesses are having difficulty finding qualified unemployed applicants. Even with all of the technological advances we are seeing, it’s hard for businesses to grow without qualified workers.

Markets:

Last year, concerned about the Fed’s rate hikes and volatility in the bond market, we decided to reduce exposure to longer-dated bonds and reallocate to short-term Treasury bills. That seemed like a sensible trade into higher-yielding and lower-risk instruments. That opportunity does not present itself very often, so we took advantage of it. Now that that seems to have largely played out, we have begun to move a portion of the bond portfolio back into higher-yielding, more intermediate-term tax-free bonds for those in higher tax brackets. Prudence advises us to maintain a position in those T-bills “just in case.”

Not much change on the equity side as we prefer to stay highly diversified and keep a portion of the portfolio “buffered” against unknown risks. David Kelly, Chief Global Strategist for J. P. Morgan recently used an apropos analogy for this season: “One of the least pleasant aspects of winter is driving on icy roads.” He goes on to say that while winter driving is possible, long experience has taught us that the prudent among us drive slower due to the narrower margin of error, and a greater chance of sliding off the road.” We still see an alarming number of investors driving above the speed limit (in speculative and concentrated portfolios) in the left lane. While they are having fun now, it may not end well for them if they hit an ice patch that they are driving too fast to see. At Tanglewood Legacy, we intend to stay away from that left lane until the weather improves.