Editor’s Observe: In the present day we’re doing one thing uncommon…
We’re sharing the lead article from this month’s problem of Chief Revenue Strategist Marc Lichtenfeld’s publication, The Oxford Revenue Letter.
Sometimes, these articles are reserved for subscribers to The Oxford Revenue Letter, however we felt that the article under had such invaluable insights into Marc’s present view of the market that it must be shared with everybody.
– Rachel Gearhart, Writer
Heading into this yr, practically everybody – together with me – known as for a recession.
Federal Reserve Chairman Jerome Powell desires of taking place within the historical past books because the second coming of Paul Volcker, the previous Fed chair who famously jacked rates of interest larger within the late Seventies and early Eighties to sort out inflation. I anticipated him to push rates of interest too excessive, inflicting the economic system to hit the brakes.
Nonetheless, as John Maynard Keynes famously stated, “When the info change, I modify my thoughts.”
Powell has boosted charges significantly. The federal funds fee has jumped 5.25 proportion factors in 18 months. And Powell has instructed that he might not be achieved elevating them. Although the latest pattern in inflation suggests Powell ought to take a breath.
In July, U.S. inflation got here in at 3.2%, a steep drop from the 9.1% excessive that was reached in June of final yr.
Whereas I nonetheless imagine Powell may overdo it, the very fact is the economic system is on stable footing and there’s little motive to anticipate a recession going ahead.
The truth is, Goldman Sachs now assigns only a 20% likelihood of a recession in 2024, and lots of others are not calling for a recession within the fast future.
Why Recession Fears Are Fizzling
One of many causes a recession was anticipated was the anticipation of a decline in spending. The concept was that customers would have burned by way of the financial savings they collected – because of these beneficiant authorities checks throughout the pandemic – by this summer time.
However there isn’t any proof of a slowdown in spending. The truth is, simply the alternative. American customers are spending greater than they ever have. In July, private spending rose 0.8%. That’s accelerated from the 0.6% rise in June and 0.2% in Could.
That’s not stunning contemplating many customers really feel flush with bubble-like dwelling costs in lots of markets, record-low unemployment and rising wages.
One other contributing issue to diminishing recession fears is the Inflation Discount Act. As with most issues in Washington, the coverage really does the alternative of its identify. It’s arduous to fathom how half a trillion {dollars} in authorities spending will scale back inflation, however that’s politics for you.
The Inflation Discount Act’s initiatives embody…
- Greater than $1 billion to farmers below monetary stress
- $11 billion to enhance electrification in rural areas
- $12 billion to improve power infrastructure.
Importantly, the plan has sparked a wave of funding within the U.S. from abroad firms. The truth is, direct overseas funding within the U.S. is now greater than double its common since 1995 and is simply off file ranges. International funding can also be greater than double what China is bringing in. That’s a giant change from 2020, when China and the U.S. have been neck and neck for attracting overseas funding.
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Extra worldwide cash is being invested within the U.S. than in another nation. In 2021, 30% of all {dollars} invested in a foreign country have been invested within the U.S. And after I say “invested,” I’m not speaking about a big buy of a sizzling tech inventory. These are overseas investments in manufacturing crops and amenities that present jobs, put a refund into the group and are anticipated to generate income for buyers.
Listed here are a couple of latest examples:
- South Korea’s Ecoplastic Corp., which makes auto components, is investing $205 million in a brand new manufacturing unit in Bulloch County, Georgia, which is predicted to create 456 jobs.
- Toyota invested $3.8 billion in a battery plant close to Greensboro, North Carolina.
- Taiwan Semiconductor Manufacturing Firm is investing a whopping $40 billion in two amenities in Phoenix, Arizona.
What Does This Imply for Traders?
All of this financial exercise, plus a two-year excessive in shopper confidence, is why I anticipate GDP progress numbers to be larger than the official 1.9% estimate in 2023 – and significantly larger than the 0.5% forecast for subsequent yr.
The markets additionally recommend a stable economic system. Bond yields proceed to maneuver larger, indicating inflation might not be over with. And the inventory market, without having a terrific summer time, has been up because the starting of the yr.
The inventory market is a forward-looking indicator, usually predicting financial circumstances about six to 9 months out.
Now, there’s one massive potential monkey wrench which may be thrown into the combo – a authorities shutdown later this month.
For the federal authorities to proceed working as regular, an settlement on spending should be reached earlier than the tip of September. As of now, that doesn’t appear probably, because the Freedom Caucus (a bunch of round 45 Republicans) is asking for a discount in spending (which might be tough sufficient to realize) in addition to requiring another political calls for to be met. These calls for embody extra motion on the border, the tip of what the caucus calls “woke” insurance policies within the Division of Protection and no “clean examine” coverage in regard to Ukraine. Democrats are unlikely to comply with any of these issues.
A authorities shutdown wouldn’t be constructive for the economic system, however any spending that’s delayed due to the closure would simply get pushed out a number of weeks or months.
If the economic system stays on stable footing and performs higher than anticipated in 2023, we must always see additional positive factors within the inventory market properly into 2024.
There’s plenty of doom and gloom on the market within the mainstream and nonmainstream media. However the information doesn’t help it, and neither do circumstances on Most important Road.
Issues aren’t excellent. Costs are nonetheless too excessive after the latest bout of excessive inflation, however the American economic system is buzzing alongside.
