The Weight of the Evidence
TLA continuously researches and monitors economic and market trends on behalf of the families we serve.
No Respect!
It would not be a stretch to refer to this economy as the Rodney Dangerfield Economy because it gets no respect. For over two years we’ve been told by the so-called pundits and talking heads that we were heading into an unavoidable recession. Well, somebody forgot to tell the actual U. S. economy. It turns out that the current expansion has been like no other, as evidenced by employers adding 2.75 million jobs over the past year. The last time the unemployment rate was this low for this long was during the height of the Vietnam War in the 1960s.
While this won’t last forever and a contraction of the economy will eventually come, the U. S. economy has been resilient, especially compared to nearly every other major economy in the world. Here are a few of the reasons: Both the fiscal and monetary authorities drove interest rates down to zero and provided businesses and households with direct payments during and after the pandemic. Smart households and businesses moved quickly to lock in ultralow interest rates on housing, automobiles, plant and equipment. Others used their stimulus checks to pay off debt. While the headlines only focus on the high interest rates for new home buyers, the average interest rate today on outstanding mortgages was recently 4.1%, barely higher than the 3.9% three years ago which was before the Fed began to raise rates back up.
Watch What I do, Not What I Say
The pundits regularly point to surveys which indicate that consumers are less confident than they were before the pandemic. Historically, economists have maintained that lower consumer confidence leads to lower consumer spending which leads to slower economic growth. Despite the current apparent skepticism, the American consumer keeps buying. It’s true that the low-income consumer has spent down their stimulus money and is taking on debt at a rate that should be of concern, but spend they do. The high-income consumer is also spending more, partly on vacations and experiences they put off during the pandemic. They’ve also seen their net worth (investments and real estate) appreciate even faster than their spending.
Total U.S. household net worth has grown by $7 trillion this year after advancing by $11 trillion in 2023. So while we should expect the low-income consumer to have to downsize their spending at some point, the high-income consumer may not. That high-income spending has resulted in the leisure and hospitality sector adding 1.3 million jobs in the past 2 years and may add another million before this cycle is over. The virtuous cycle here could mean that these 1 million new employees would create one million new consumers. That could help them pay down some of that debt and would be an additional boost for the economy.
Higher for longer rates likely means interest rate-sensitive sectors of the economy like residential and commercial real estate may see a slow-down in employment, but at the same time new government spending on factories for computer chips and infrastructure will maintain the need for high-paying jobs.
Other surveys indicate small business owners are pessimistic, yet new business registrations last year were up 53% versus pre-pandemic 2019. This huge jump in new businesses has also boosted job growth.
Valuation and Skepticism
All indications are that second quarter earnings could be very strong, likely 9-10% higher than the same period last year. With strong fundamentals like low unemployment, lower (albeit sticky) inflation, and a strong dollar that remains the envy of the world, why aren’t we more aggressively positioned at TLA?
First, much of the earnings increases may already be priced into the market, which at 21 times forward earnings is certainly not cheap.
Second, looking over the horizon, the U.S. will eventually need to deal with the government debt and the “entitlements” deficit. That will not come without pain.
Third, and ironically, at the same time that we hear about economic pessimism, the level of investor speculation is nearing extreme levels. The Fear-Of-Missing-Out (FOMO) crowd has either never seen bubbles or has forgotten about them. Whether in the form of concentrated portfolios, social media-driven schemes, reaching for yield or buying on margin, speculation is rampant. TLA is keeping our distance from all of these.
We would not be surprised to see additional volatility as we enter the election season. We therefore expect to remain fairly defensive by “buffering” that volatility as best we can without giving up growth potential.
