January 5, 2024
2023 concluded with a strong showing for American workers. US nonfarm payrolls expanded by 216,000 during December and the official unemployment rate remains below 4.0%. U6 did tick marginally higher to 7.1% with labor force participation declining to 62.5%. Hourly wages jumped 0.4% MoM even as job openings appear to be slowing to a sub-9M clip (November JOLT’s 8.79M). The “stickiness” of wage gains in the face of softening labor demand is likely a symptom of the American economy’s non-manufacturing orientation. Said differently, wages tend to be more resilient among the service industries. Overall this report from BLS seems consistent with an overall Q4 deceleration in the domestic economy, but it isn’t the type of slowdown that should spark Fed action. We continue to think Jay Powell is further from cutting rates than the markets have been anticipating.
We spent much of the past couple of years slicing and dicing various inflation-related reports and data points. Domestic inflationary pressures largely hinge around both US and global economic inputs. So, today we are zooming out a bit to add some global flavor to our New Year market mix. Let’s start across the pond and roll east from there— I will do my best to provide an “abridged” version for purposes of this note. Ready, set, here we go…
Europe is struggling. With GDP (real/ inflation-adjusted) flattening and sentiment softening, the economic picture is far from ideal. The silver lining is inflation remains rather subdued. Certainly, the land war in Ukraine has had an economic impact lately, but secular decline is the real story here. Migratory flows from areas prone to hostilities (i.e. the Middle East) in tandem with the financial woes of debt strapped sovereign states and a “challenging” currency framework present quite the puzzle for policymakers. To be sure, these are not “new” problems for our friends in Europe, but the tendency to kick the can has presented some real economic and demographic difficulties. On a per share basis revenue is still well below 2007 levels! European margins have improved markedly over the past fifteen years, BUT expectations for earnings growth are moderating toward mid-single digits for the upcoming year. Even under the most bullish scenario, corporate earnings will remain significantly below pre-financial crisis levels— CRIKEY! A cursory look at stock indexes paints a more benign picture, however, with European indices hovering near all-time highs (all hail the European Central Bank). Of course, we are experiencing something relatively similar with respect to markets here in the US but for very different reasons.
Russia, Iran, and China form the cohort of “hostile states” to US interests. They also happen to lack economic transparency for our purposes. So, the game here is largely predicated on geopolitics—we like to think of this in terms of reshaping the alignments of trade and influence. Though largely antagonistic of Washington and a growing menace in the Pacific, Beijing would like to be viewed as a “peace broker” on the global stage. Perhaps this is because China has the most to lose should it miscalculate. However, we must note that President Xi continues to insist on the importance of reuniting China with an avaricious eye cast toward Taiwan. Meanwhile, Putin ostensibly would like peace in Ukraine (wars tend to be expensive) BUT on Russian terms (a nonstarter for Ukraine and its allies). Meanwhile, Tehran continues to act as a conduit of terror in its support for nefarious organizations such as Hamas and other belligerent groups including the Yemeni Houthis. While on the topic of arming combatants, I suppose we should also mention North Korea given Kim Jong Un’s commitment to supply Putin’s forces in Ukraine. Unfortunately, there isn’t a clear path to peace in either Ukraine or the Middle East. Hostilities on a new scale are sadly becoming the norm.
A decade ago who would have thought a Chinese 3-Month treasury bill would trade at less than half the rate of a comparable US treasury bill? Certainly, not I! Remember the Chinese growth stories that traversed the airways? Please keep in mind stronger economic growth tends to correlate with higher interest rates. Well, times have certainly changed and the shoe is on the other foot these days. The wealth effect has an outsized impact on any service-lead economy. China watchers are witnessing the clear impact of depressed stock prices (US dollar and local currency terms), a troubled real estate sector, and a less than stellar post-Covid economic reopening. Absent these very relevant factors, China is also experiencing the growth pains associated with a transition from its manufacturing/ production-based economic approach to a model that is driven more by services. The success or failure of this seismic economic shift will have a very real impact on the price of various commodities and finished goods. To a certain extent, China (in the present) is a victim of its (past) success, but there have been policy errors along the way. Xi’s missteps have certainly made things more difficult over the years for Beijing, but the Chinese transition is something we are paying close attention to in the coming year—and going forward.
Our view for 2024 in US financial markets is largely benign for risk assets (S&P 500 target 5050)—it’s nice to be able to say that for the first time in a couple of years. Though markets have recalibrated for higher rates and the economy is adapting, we see room to run for US stocks albeit somewhat limited in the present. A more tranquil environment for bonds is also likely in the cards in ‘24. This is not to say that the investment landscape is without risk (quite the opposite actually). The risks are simply different at this juncture given the dynamics underpinning markets and asset prices. We have used the recent rally in equities to recalibrate our strategic positioning; we favor a more balanced approach to risk in our strategic sleeve in the current environment. Meanwhile, we are actively looking for opportunities to deploy capital in our tactical allocations. Happy New Year!
News Release: Bureau of Labor Statistics (The Employment Situation- December 2023)
Originally posted on Total Wealth Partners website.
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