Boom or bust?
War, political dysfunction, the coming recession and the (many) dangers posed by Artificial Intelligence have dominated the front pages this last week. Meanwhile, in the world of investments we have started to see equity markets sag amidst ever higher interest rates and incoming corporate earnings.
As usual, there is much to worry about, with the media heavily incentivised to help.[1] Here, we will try and explore again some of the context for the difficult moment we are in, and where the pervasive gloom might be misplaced.
US economy
Nowcasting is a modern activity aimed at combatting the inherent lag in economic data releases. Often because of the difficulties in gathering and synthesising such data into something useful and comparable, we are served up a snapshot of what things looked like months ago. As the word suggests, nowcasting attempts to use real time and other timelier data to paint a more contemporary picture.
There are many such attempts. One of the more plausible in the US comes from the Atlanta Federal Reserve.[2] The message from their nowcast is shockingly positive. Far from buckling under the weight of the step change in policy rates, the US economy would appear to be booming. As we pointed out last week, the US consumer seems to be at the heart of this impressive continuing pep.
Nominal consumer spending has been growing at double the annualised pace seen prior to the pandemic for the last 6 months. Given the role of the US consumer as lynchpin of the global economy, that is a giant and important tailwind to consider. That this vital force in the world is now enjoying positive inflation-adjusted wage growth for the first time in a few years should not be underestimated either.
Of course, as we’ve pointed out before, this could simply be a mixture of hubris and impatience. Perhaps the effects of the policy rises already enacted by the central bankers are simply gathering in the shadows. Those (in)famous lags so long and so variable that just as we lose patience, they strike!
A fourth quarter slowdown?
In fact, the doomers may start to scent victory in the fourth quarter even without a gathering effect from higher interest rates. There are several potholes for the US economy to manage going into the end of the year, from the risk of a government shut down to the effects of restarting student loan repayments.
Some are arguing that these could slow measured growth in the US and perhaps help cool febrile bond markets in the process. That could in turn be helpful to stock markets, as the stiffening valuation headwind from bond yields calms.
Even without those potholes, many will point to credit supply data as a darkening augur of imminent doom. There is certainly some intuition and track record to this impulse as a lead indicator for the economy. However, as with all indicators and data points at all times, we need to be careful with context - the distortions of the pandemic and the unprecedented policy maker response remain many and various.[3]
For what it’s worth the message from the major US banks would appear to be benign for the most part. The quarterly deluge of company earnings reports points to stable credit quality and more settled deposit bases (although there is clear evidence of stepped-up activity to attract and retain deposits with greater pass through of policy rate hikes into deposit rates).
The tech titans have so far provided mixed fare for their part, certainly relative to very lofty investor expectations. Earnings season has a long way to go yet all the same and, as usual, we would caution reading too much into these corporate snapshots. Sifting any signal from the quarterly torrent of noise is a full-time job best performed by focused specialists.
Investment conclusion
Keep an open mind is the familiar refrain. There are, as ever, a range of potential paths ahead for the world. Not all of them tilt towards the apocalypse so deftly painted by much of the media. The apparent US economic boom could continue. From the perplexing surge in pandemic business formation[4] to the arrival of large language models and other technologies, there is much that is different this time.
It may not sound like advice you would want to pay for but ‘close your eyes and stick with it’ is often the most appropriate investment strategy for long-term, diversified investors. Even when the noise of chaos is loud and rising, consciously doing nothing in the short term – because you back your long-term asset allocation – can be more rewarding than feeling forced to do something.
As a very narrow example, cast your mind back to mid-March 2020, a dark moment of lockdown and pandemic panic. The price of the US stock market (the S&P 500) plunged a sickening third in a matter of weeks. Understandably many individuals were thrown by this shocking experience and tapped out for fear of more...
Those who managed to sit tight are likely thankful that they did, with the index offering a total return of over 80% since then. It’s a niche example and long-term investors always need longer-term perspective, (Figure 1) but it’s a period worth referencing when we talk about the concept of chaos and investor behaviour.
As always, we are here to make sure that your investments are working as hard as they can be, tethered optimally to a world economy that is not new to defying its many critics.
(And if you want more attempts at clarity amid the ever changing investments landscape, don’t forget to subscribe to our weekly ‘Word on the Street’ podcast.)
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[3] Klein, Matthew C (Oct 25th 2023) – The US economy is booming (for now). What does it mean? The overshoot - Substack
Annual discrete returns (%)
Year
S&P 500
2018
-4.4
2019
31.5
2020
18.4
2021
28.7
2022
-18.1?
Advisor to a Web3 Fintech, an Impact VC, a Hedge Fund, a Zero Emissions Shipbuilder, a Token Valuation platform & an Endowment. Ranked in Top 10 Most Influential Service Providers to the Investment Space, 2022/3/4/5.
1 å¹´Good question, William Hobbs