Focused Investing: Economy & Markets Update

The second week of February means the end of baseball’s Hot Stove League, or the offseason, when trades and free agents get new- and sometimes sizeable- contracts and marks the start of Spring Training. The new contracts and trades are often based on historical numbers of the players and projections that those players will live up to or improve on the historical numbers. Many times, the projections of past performance into the future prove to be pessimistic and the player outperforms even the highest expectations; but frequently the projections prove to be overly optimistic, and the new contract or trade proves horrible for the “new” team. I have always loved baseball largely because I think hitting is the most difficult skill to acquire in sports. A small, hard, white ball is pitched toward the batter at speeds sometimes greater than 100 mile per hour from 60 feet away and the batter has less than a second to decide to swing or not swing, a difficult decision to make in such a short period of time. Because of this, projections in baseball are incredibly difficult to get right.

What Happened

An analogous situation holds true in investment management. Economic and corporate reports are not pitched at one hundred miles per hour, we get a large volume of reports that must be assimilated into a cohesive whole that we then make projections about an unknowable future. The consensus last year was the U.S. economy would fall into a recession in 2023. A recession did not happen when originally projected, so the onset of a recession was moved deeper into 2023, and finally into 2024. This year, the consensus is there will be no recession this year and as of now, the economic data supports this projection. Activity in both the services and manufacturing sectors of the economy are improving. Indeed, the manufacturing sector that has been in contraction since late 2022, is moving closer to expansion territory. Importantly, new orders and employment in the sector increased in January which bodes well for the near future. Employment and new orders were also higher in the services sector in January. The first-time unemployment claims confirm the information manufacturing and services sectors as the number of people filing for unemployment insurance declined 9,000 to 218,000.

Fourth quarter earnings continued to come out last week with overall solid growth. Through Friday morning, margins were lower as revenue growth in the fourth quarter was 3.9% but earnings were up 2.9% overall. Financials were the source of the decline in margins as that sector posted a strong 6.7% growth in revenues, but earnings plunged over 15% from the fourth quarter of 2022. Natural resource sectors also contributed to the decline in margins in the quarter.

This Week

The first report out this week is January inflation when the consumer price index was released Tuesday and the second big report, the producer price index, comes out Friday. Overall, expectations are looking for inflation to show falling pressures in January, but we could see upticks in March and April as energy and shipping prices have increased due to global unrest. We will also get a glimpse on the health of the consumer when retail sales data from the National Federation of Retailers and the Census Bureau release their respective estimates of retail sales in January. Both reports are likely to show weaker sales relative to a strong December.

That good news we have seen from January is likely to continue for at several months and longer as economic data tends to have a momentum component. We are optimistic about the January reports and what they say about the health of the economy. With that said, any forecast that we will be able to avoid a recession or not is not something we are looking at. Instead, we are focused on finding the pitches in the capital markets that we can hit, so we are looking for companies that offer attractive upside for our clients, whether stocks or bonds and the market always supplies attractive companies when we are diligent in our search for them.

Clinton S. McGarvin, CFA, is a Senior Portfolio Manager. Clint is a part of the investment team covering Global Equities, Fixed Income and Real Estate Investment Trusts. He is involved in all aspects of managing client portfolios and has worked in the investment industry for more than 16 years with a strong track record of equity research, portfolio management, and client service. To speak with Clint McGarvin, please contact our office at (503) 292-1041 or via email at info@allentrust.com.