This Week’s “Noise”
Lots of data recently; In short, the slowing growth projections for GDP seem to be coming to fruition. Atlanta Fed real time GDPNow index was revised from 2.7% down to 1.8%. Any notion of rate increases with these headlines is quickly fading. As a response, the 10yr Treasury dropped from the peaks just a few weeks ago.
Other notable data points:
- May ISM Manufacturing printed at 48.7 or below 49.7. April’s number was 49.2; this shows signs by the business community of the sluggish growth many have been expecting for some time.
- Additionally, the Price Paid index ticked lower. New orders were also down to 45.4 from the previous 49.1.
- Employment Index rose to 51.1 (up from 48.6).
- The Personal Consumption Expenditures Price Index (PCE), the Fed’s preferred inflation measure, came out last week showing negative real personal income and consumer spending, but in line with expectations.
- Job Openings and Labor Turnover Survey (JOLTS) came in below consensus.
- ISM Services index surprised on the upside with 53.8 of estimates of 50.8.
- Non-Farm payroll numbers to be released Friday.
- ADP Payroll came in below consensus with 152k versus expectation of 172k.
(Source: FactSet)
Another reminder: As humans we are terrible at conceptualizing the rate of inflation. Typically, we remember the hard cost of XYZ good and not how much the cost has risen in a given time frame. This sort of direct comparison doesn’t bode well for intuitively evaluating a slowing rate of inflation.
Current Market Outlook (6 to 12 months)
Market
We are near half time for ’24; so far the market has risen from overly negative sentiment in ’23 and good earning numbers in the first 2 quarters. Based on expectations, if the Price to Earnings ratio (P/E) holds steady the market has already priced in growth at a slower pace than last year, but still ultimately higher earnings per share. We may have gotten much of the upward move for the year in already with the next few months either churning sideways or a series of pullbacks that then return similar levels.
Economic
Retailers have begun to cut prices on certain items (Target, McDonald’s, Aldi, Walmart to name a few). Personal Consumption Expenditures Price Index (PCE) didn’t just come down for April, the report also revised the Core PCE number for Q1 down as well. When the U.S. grew last year it did so at a break neck speed; our earlier predictions about slower than trend growth and a return to low single digit U.S. GDP growth seem to be in line with data YTD.
The POTUS election in November is still anyone’s guess; commentary and handwringing will likely begin to increase over the summer. It’s always difficult but as we’ve discussed before, people’s view of the economy and the market change when “their team” is holding office. That is, however, only a perception. The reality is any POTUS may try to use policy to drive certain economic activity, but the real impact comes from the individuals in this world engaging in commerce.
Long-Term View (4 to 7 years)
Long term we believe the US economy will continue to outperform other world economies. This is supported by combination of re-shoring manufacturing, new investments resulting from the Inflation Reduction Act, US energy independence, and higher productivity due to the implementation of Artificial Intelligence (AI) software/systems.
We started 2023 predicting the broad stock market would return to the old highs in one to two years. It took only one year. We believe the US stock market should be 40% to 60% higher by the end of 2028. A S&P 500 index of 7,000 to 8,000 appears possible.
Bonds have re-emerged as an important part of asset allocation as yields have risen. We expect a diversified bond portfolio to produce returns 3% to 5% above inflation for the next 5 to 7 years.
"The desire to perform all the time is usually a barrier to performing over time."
-Robert Olstein
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