Notes on the Week Ahead

I think of myself as a pretty punctual person.  I get impatient when others are late and I don’t give myself much time to spare when catching a flight.  But sometimes, like when spending time with family, it’s OK to run a little behind schedule. One month into 2024, the economic slowdown appears to be running behind schedule.  Growth is stronger than expected, the labor market is tighter and our forecast for inflation to hit 2% by the end of the year looks less certain.  But for investors, it should be all good.  Our 2.0.2.4. forecast of 2% growth, 0 recessions, inflation falling to 2% and unemployment at around 4% is now looking a little more like 2+.0.2+.4-.  But it still rounds to 2024, leaving plenty of opportunity for long-term investors.

This Friday, the groundhog will emerge unwillingly from his lair, examine the available evidence, that is to say, the presence or absence of his shadow, and, in all probability, reject any speculation about an early spring - at least for the next six weeks. According to USA Today, this has been the groundhog’s prediction in 107 of the last 127 years, or 84% of the time. That being said, the weather channel is forecasting “considerable cloudiness” over Punxsutawney, PA on February 2nd, so we might still get lucky.

Last Friday, as much of America was settling in for the coldest weekend of the year, the University of Michigan released its preliminary January reading on consumer sentiment.  The numbers were a pleasant surprise – the consumer sentiment index jumped 9.1 points to a reading of 78.8 – the best number seen since July 2021.  This confirmed other signs of a thaw in the public mood.  The Conference Board’s consumer confidence index rose 9.1 points in December to its second highest reading in two years while even the perennially negative Gallup survey on “satisfaction with the way things are going in the U.S.”, showed some improvement in December.

Every January, firms throughout the financial industry, including our own, hold annual training meetings or conferences.  One of the highlights of these meetings is an award for salesperson or sales team of the year.  These titles are hard-earned and well-deserved.  At least for our own firm, I can say that the winners are always those who, not only achieve impressive revenues for the firm, but do so through very hard work, understanding the investment environment and, most of all, understanding the needs of our clients.

Among the many comments on inflation in the minutes of the last FOMC meeting was the following, rather gloomy, prediction: Several participants assessed that healing in supply chains and labor supply was largely complete, and therefore that continued progress on reducing inflation may need to come from further softening in product and labor demand with restrictive monetary policy continuing to play a central role. Translating from Fedspeak: Several Fed officials worried that they might still have to trigger a recession to get inflation all the way down to their 2% target. This perspective gained some support in Friday’s jobs report which showed a stalling out in a long trend of falling wage growth.  However, a broader analysis suggests that non-labor-market factors will continue to reduce inflation in 2024, giving the labor market time to normalize without the pain of recession.  While there are plenty of shocks or policy mistakes that could disrupt this path, the mostly likely scenario is a continued slide in inflation to the Fed’s 2% target without a near-term recession – an outcome that should support both U.S. bonds and stocks.

As one year ends and another starts, I often think about a personal balance sheet for the year gone by and make some resolutions for the year ahead. For myself and our own family, 2023 was a pretty good year, particularly relative to the pandemic-scarred years at the start of this decade. As for resolutions, apart from the usual healthy-living aspirations, I am determined to spend less time looking at screens and more time looking at faces. This is also a good time for investors to review the balance sheet of economic and investment performance for 2023 and make some resolutions for the year ahead.

Podcast discusses long-term economic trends, impact of jobs report, expectations of wage growth moderation, and upcoming Federal Reserve meeting and economic projections.

One of the least pleasant aspects of winter is driving on icy roads as the snow piles up in front of you. Long experience has taught us that winter driving is possible. But it is slower, with a narrower margin for error, and a greater chance of sliding off the road. Similarly, if we extend the economic forecast horizon to encompass not just 2024 but also 2025, it’s still possible to trace out a “soft-landing” scenario, whereby the economy keeps growing even as inflation returns to the Fed’s 2% target. However, it would be, at best, slow-going and, like driving into a worsening snowstorm, there is a rising risk of the economy sliding into recession.

Last Wednesday, the University of Michigan released its final reading on consumer sentiment for November, with the index coming in at 61.3, up from its flash reading but down from October and worse than 92% of monthly sentiment readings since 1978. Meanwhile, the “misery index” for October, calculated as the sum of the unemployment rate and the year-over-year CPI inflation rate, came in at 7.1%, better (or that is to say, lower) that it has been 79% of the time over the same period. We continue to have a bottom decile attitude about a top quartile economy. This general gloom may account for part of the recent buildup in retail money-market funds which have risen by almost 50% over the past year to over $2.2 trillion. While some of this is the result of outflows from bank deposits, much of it represents long-term savings that investors are unwilling to commit to long-term investments.

If you do a quick google search on the phrase “tensions rising”, you get 230,000 hits. If you search the phrase “tensions falling” you get 3,700 hits. One of the cardinal rules of journalism is to only report on rising tensions and never improvement. However, in recent weeks, there has been a quiet decline in tensions across a number of dimensions. This is being matched by falling inflation pressures and signs of moderating economic growth. After a turbulent few months, the economy seems to be back on the soft-landing track, a path that should support both the stock and bond markets and also allow the dollar to resume its stalled out decline.