Weekly Market Insights 02.12.24

Markets are at Record Levels, Economy is Looking Fine, Consumers Remain Unsure

Financial Markets

United States equity markets continued on their remarkable bull run this past week. The S&P 500 closed Friday’s session at 5,027, up 1.37%, marking the fourteenth time in fifteen weeks that the index closed higher.  Remarkably, this is the first time since 1972.  The other major equity indexes also gained, with the Dow Industrials up 0.04% and the NASDAQ up 2.31%.  The interesting question on the minds of many—is the market priced appropriately?  While no one really knows for sure, we can look at earnings and the economy for guidance.  The first thing to address is earnings.  Earnings have exceeded expectations, which is certainly a positive.  Much has been said about just a few mega-cap stocks being the primary drivers of this rally.  There is some truth to this, but critics have to concede that, for the most part, while the companies’ earnings have been very good, their businesses still haven’t come close to fulfilling their full economic potential.  Investors should keep in mind John Templeton’s description of the relationship between sentiment and the investment cycle when he said, “Bull Markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”  This sounds very logical, but the question is how do we know where we are?  Perhaps, that is where economics helps.

Economics

Nothing on the United States economic blackboard has changed much over the past week, but we are paying attention to six areas:  monetary policy, fiscal policy, the real economy, consumer confidence, and international.

Monetary policy in the United States appears to be in a good place, and Chairman Powell has kept investors well informed about where the Fed stands.  Their aim, of course, is to first ensure that inflation continues to slow on a clear path to their 2% target.  They are holding rates steady and are hesitant to cut too early in order to make sure inflation does not reignite, nor the economy fall into recession.  Trying to achieve these goals simultaneously is inclined to please no one.  That is probably a positive.  Ultimately, we put monetary policy on the positive side of the ledger.

Fiscal policy is in a shambles.  This should come as a surprise to no one.  The most obvious sign can be seen in the House of Representatives and their inability to pass any fiscal legislation.  Somehow the majority party has found themselves in a position where they seemingly cannot internally agree on anything.

Remarkably, the real economy is doing very well.  As we know, consumer spending is about 70% of the U.S. GDP, so job creation and unemployment are very important statistics to gauge the overall economy.  Employers have been telling us that it has been quite difficult to fill job openings.  The latest government release on the quit rate shows that it has been falling, which should relieve some of that employment pressure.  Along with this, wage growth has remained strong, particularly middle and lower-wage earners.  The real question is, why are Americans unhappy and apprehensive about the economic future?  To a great degree, we answered that question last week.  Although economic statistics indicate that Americans are doing well, they still have fears about the future and displeasure about the cumulative effects of inflation.  Their concerns range from technology, particularly AI taking their jobs, to wars in both Europe and the Middle East, to political turmoil at home.  As we wrote last week, consumer confidence surveys are showing some improvement, but there remains a lot of doubt.

Conclusion

A dominant event affecting both the United States economy and public confidence has been the paralysis of the House of Representatives.  The House, of course, is vital to the progress of spending bills.  Therefore, bills, ranging from the support of our allies to the federal budget, are dependent on a smooth functioning House.  Interestingly, at the moment, Congress’ inaction hasn’t deterred equity investors.  Investors are seemingly choosing to pay attention to economics over politics.

Earlier, we delineated Mr. Templeton’s four stages of the investment cycle, keeping in mind that deciding which stage we are in is almost a parlor game.  Looking at current market behavior and public sentiment, we seem to be at a point between skepticism and optimism, although some sentiment data is tilting towards optimism. Having said that, we don’t think there is enough evidence to suggest investors move aggressively in either direction, but we are watching for signs of excessive enthusiasm.  In our next paper, we take a deep dive into Asia.

We will not be publishing for the next two weeks and will return on March 4. 

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