By Daniel McGarvey, CFA, Senior Portfolio Analyst, on behalf of Stonebridge Financial Group advisors
While some major global economies have struggled in the past year, the United States has been remarkably resilient. In the most recent quarter, real GDP rose at a 3.3% annual rate, with consumer spending and the labor market still looking quite solid. Despite some weakness in sectors like housing and manufacturing, we are seeing continued growth and personal consumption expenditures inflation falling below 3%. The big question is if the long lags of monetary policy have yet to take effect or if we are truly capable of withstanding the tightening. As shown below, S&P companies and consumers seem to be growing far less concerned about a recession. However, although we have been guilty of underestimating the economy so far, there is still a chance we could see some delayed tightening effects. A soft landing in 2024 might be more likely than a recession at this point, but our odds are not far from 50/50.
A factor that could continue to boost the economy is the government’s desire to add a degree of cushion before the election through stimulative fiscal policy. This sort of priming is not uncommon for incumbents in re-election years. Additionally, we have seen monetary conditions start easing even without rate cuts by the Federal Reserve. Through the announcement of slower-than-expected Treasury bond issuance, increases in bank reserves and markets pricing in expected dovish policy, risk assets have moved higher, and yields are acting as if the Fed has already begun cutting. It will be interesting to see how many cuts are needed if growth is strong and these trends continue, although fewer cuts than expected could be a headwind for equities. It is also possible that rates could rise if more borrowing will be needed than previously announced, as was the case last year when the Congressional Budget Office’s deficit projection was off by $1 trillion.
Inflation staying anchored will be crucial for the soft landing story to play out, and Fed Chair Jerome Powell made it clear in the January Federal Open Market Committee meeting that this is the committee’s primary concern, and the goal has not been met yet. A global event leading to more supply chain issues or higher oil prices could affect their plan materially. We would also note that our deficit is still a major concern and that even if our policymakers work hard enough to avoid a recession this year, eventually we will have to pay some price for our spending. The cost of stimulus programs continues to rise for every U.S. citizen as the government has to re-price its cost of borrowing with higher interest rates, and the burden could be paid by future generations, if not in the coming years.
Equities had a positive start to the year as the S&P 500 returned 1.7% in January. The Bloomberg US Aggregate Bond Index ended its winning streak by returning -0.3% as the 10-year Treasury Rate ended around 3.9%. The Federal Reserve kept rates in the 525-550bps range and indicated that it might not be confident enough to cut rates in March.
Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.
Daniel is a Portfolio Analyst at Stonebridge Financial Group and works on portfolio analysis and other related tasks. When away from the office, Daniel spends his time playing guitar, reading, and exploring the outdoors.