Focused Investing: Economy & Markets Update

We know in the Pacific Northwest, rain is a fact of life, more so in the winter and spring than in the summer, it does rain in the summer but that is not the normal day. A normal summer gives us lots of sun with rain occasionally, whereas winter supplies us with lots of clouds and rain and bits of sun. Over a full summer we are not disappointed over the amount of sun we get, this is the “long-term”, and this is climate. However, if you plan a summer vacation at the beach expecting lots of warm sunshine and fun frolicking in the water, you may be disappointed because what you could get is a week full of cool clouds and daily rain. This is the “short-term”, this is weather. The short-term and long-term are fundamentally different, planning that beach vacation, you are guessing the weather will be nice and sunny, but planning a full summer removes much of the guess work.

Investing and economic predictions are the same. It is safe to predict that over the long-term jobs will increase, GDP will increase, and equity markets will increase, much like predicting the climate. On the other hand, predicting if jobs will increase this month, or that equity markets will increase this month, or this year, is much like predicting the what the weather will be like the week of June 17, 2024; it is probably going to be sunny but maybe it won’t be.

What Happened

Predicting economic data over the last few months has been iffy at best. The two easiest predictions made were what the Fed would do at its December meeting and inflation. Inflation declined further in November, which was widely predicted, falling to a 5-month low of 3.12% year-over-year. The outlook is for inflation to fall further in the coming months and year. The Fed did not change its target rate, as almost 100% of Fed watchers predicted, holding the rate in the range of 5.25%-5.5%. The Fed did surprise market watchers by stating that the Board believes it will cut rates three times in 2024 as inflation cools and unemployment ticks higher.

The November nonfarm payrolls release was also widely predicted, with the economy adding 199,000 jobs compared to estimates of 190,000 additional jobs. What did surprise, however, was the decline in the unemployment rate from the predicted 3.9% to 3.7% in the month. The jobs data was distorted by the return to work of the auto and Hollywood workers following the ending of their respective strikes. Even so, this was a strong report and lends support to the idea of a soft-landing of the economy in 2024. Adding to this, was a surprise decline in first time unemployment claims, which dropped from 221,000 to 202,000 while expectations were calling for basically no change. This suggests labor markets should remain strong through the end of the year.

The remaining reports did offer surprises. Perhaps in getting a jump on Christmas shopping, consumers pushed retail sales to a jump of 0.3% in November compared to expectations of a decline of 0.1%. A more accurate measure of retail sales from CNBC and the National Retail Federation (NRF) showed that retail sales jumped 0.77% last month. Aligned with this report was the S&P service sector activity index posting a surprise increase, rising to a 5-month high. On the other hand, manufacturing activity disappointed to the downside as the S&P manufacturing activity index dropped further into contraction territory when expectations were looking for slight improvement. On balance, these two reports showed the U.S. economy gained some momentum heading into the end of the year closing with the best growth since July.

This week

This week is light on economic news, led by the release of Personal Consumption Expenditures on Friday. This report includes the Fed’s favored inflation metric, the PCE price index, and expectations are looking for basically no change in the headline number but excluding food and energy to arrive at core PCE inflation, we are expecting a decline from 3.5% to 3.2%.

Over the last two weeks, some of the predictions proved accurate, but many proved much less so. This is why it is best to take a long-term view of the economy and investing and not worry so much about the daily, weekly, and monthly gyrations of the numbers. Finding companies and sectors that can weather economic hurricanes and emerge on the other side stronger means those investments will be better than the market in the long-term, but the short-term is just a guess at best, exactly like what the weather will be on June 17, 2024. We do our best to prepare you for the long-term climate while weathering the unexpected rain showers on the beach.

Clinton S. McGarvin, CFA, is a Senior Portfolio Manager. He received his B.S in Mathematics from The University of Arizona and an MBA/MSF from The University of Denver Daniels College of Business. Later Clint received the Certificate in ESG awarded by the CFA Institute. To speak with Clint McGarvin, please contact our office at (503) 292-1041 or via email at info@allentrust.com.