Markets can change, sometimes quickly and when many people least expect it. After a few hard months for investors the stock market indexes we follow turned notably higher in November. At the same time bond yields moved lower on speculation that the Federal Reserve Bank’s rate hike cycle has come to an end. The US Dollar Index and the CRB Commodities Index were both lower for the month.
All data as of 11/30/2023, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
The stock market doesn’t exist in a vacuum, but is a product of what is happening in the world. This is the reason we follow not just the major stock indexes, but also bonds, commodities and currencies. We truly believe that understanding the relationship between asset classes can help clarify the bigger investment picture. The same can be said for the economy.
Every December, like clockwork, the thought of what the markets and the economy will look like in the coming year comes front-and-center in the world of investments in the form of yearly forecasts. These forecasts usually discuss expectations for various asset classes – stocks, bonds, commodities, etc. – as well as the economy. In addition, target numbers for various financial indices like the S&P500 are presented. How seriously one should take these missives is debatable.
At Magellan Financial we avoid making big predictions and never think about a price target for any of the indexes we follow. Instead, we like to think about the big picture and what we believe is probable, as opposed to just what is possible. We like to avoid the noise and really focus in on what we feel is truly important for your investments. Top of our list right now, in our opinion, is the US economy.
While we agree that the stock market is not the economy, we do believe they correlate in a way that matters in three ways:
- The overall economy determines the overall level of income and spending, which influences the demand for goods and services that companies produce.
- The overall economy can also affect the availability and cost of credit in the market, which influences the supply and demand of capital companies use to grow their business.
- The overall economy can also affect the expectations and confidence of investors, which can influence risk appetite and investment decisions.
Where does the economy stand today?
The quick answer is it is in pretty good shape. As of the third quarter of 2023, the U.S. economy is showing robust growth as the Gross Domestic Product (GDP) increased at a recently revised rate of 5.2% in the third quarter. As per the Bureau of Economic Analysis (BEA)the growth primarily reflects increases in consumer spending and inventory investment.¹
Chart #1: U.S. Bureau of Economic Analysis, “Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product” (accessed Thursday, November 30, 2023).
Drilling down a bit, it is important to note that the U.S. economy is heavily influenced by consumer spending habits, as consumer spending consistently accounts for about 70% of the U.S. economy. This consumption is divided into two major categories: non-discretionary spending on necessities such as food, medicine, housing, clothing, and discretionary spending.² Given the current GDP numbers, the consumer appears to be doing just fine.
Chart #2: U.S. Bureau of Economic Analysis, “ Personal Income and Outlays, October 2023” (accessed Thursday, November 30, 2023).
While we believe that the current jobs situation has something to do with the resilient consumer, we do see reason for concern. The employment numbers, while weakening a bit these past few months, continue to be positive. According to the Bureau of Labor Statistics, the total nonfarm payroll employment increase of 150,000 in October was below the 12-month average monthly gain of 248,000.³ Looking ahead, however, Wells Fargo Investment Institute (WFII) is projecting the unemployment rate to be 5.6% in 2024, up from the current 3.9%, suggesting a reversal in the job growth trends.
What about consumer sentiment?
The University of Michigan’s consumer sentiment index is one of the most closely watched indicators of consumer sentiment. This index, it should be noted, isn’t a perfect indicator as it can sometimes show a divergence from actual consumer behavior. For instance, in August 2023, the index fell to 71.2, down from 71.6 in July, despite signs of cooling inflation and rising wages. Similarly, in September 2023, the index retreated to 67.7 from 69.5 in August, even though short-run and long-run expectations for economic conditions improved modestly.⁴
So, while not perfect, we believe economic sentiment numbers is still a useful indicator of how consumers and investors feel about the current and future state of the economy when combined with other sources of information, such as economic data, market trends, and expert analysis. In our opinion, the current readings are positive as they represent an increase from the previous year.
Putting it all together
Wells Fargo Investment Institute (WFII) sees US inflation dipping to 2.5% and US GDP growth of 0.7% in 2024. While forecasts are just that – forecasts – it does indicate expectations for a slowing of the US economy in 2024. We should note that a year ago most of the economic forecasts we saw were talking about an economic recession that never materialized.
Yet, despite the prediction of lower GDP growth in 2024, the consumer doesn’t appear to have gotten the memo. Online spending hit record levels for both Black Friday⁵ and Cyber Monday.⁶ Air travel hit record levels over the same weekend.⁷ At least for now, the consumer is still spending.
And while consumer sentiment has ticked down, we do not see a correlation between the drop in sentiment and a drop in consumer spending. In fact, the numbers indicate we have seen just the opposite!
Final Thoughts
The stock market is a market of stocks that is influenced by a variety of factors of which the US economy is just one. Because we believe it is an important factor, when we think about our expectations for the stock market moving forward, we always consider what is happening with the general economic conditions of the country. While we believe that Corporate America has become very good at maintaining its profit margins in challenging economic environments, that doesn’t necessarily lead to immediate gains for the stock market indexes.
At the same time, we are skeptical of what we consider to be low expectations for the economy in 2024 for two reasons. The first reason is the current employment situation. From our perspective, it is hard to see a slowdown in consumer spending when the employment numbers continue to grow. To lose our cynicism we would need to see a noticeable change in the employment situation.
The second reason has to do with Artificial Intelligence (AI). Quickly becoming important to Corporate America, AI is creating jobs and increasing productivity and efficiency. We see it in our own business. And according to McKinsey estimates an additional $13 trillion of global economic output is possible between now and 2030.⁸ We are of the opinion that any positive economic effect in the short-term of AI implementation is hard, if not impossible, to quantify at this point in time.
Eventually an economic recession will happen in the United States. We do not believe, at the start of December 2023, that a recession is on the horizon and, for the stock market investor, this is a positive. We do not believe that the economy will have negative effect for equity investors at this time. At some point the data will change … and so will our opinion.
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2. The Spending Habits of Americans (investopedia.com)
3. The Employment Situation – October 2023 (Bureau of Labor Statistics)
4. University of Michigan: Consumer Sentiment (FRED Economic Data – St Louis Fed)
5. Black Friday online sales reach record level (Fox News)
6. Cyber-Monday hits all-time record (Axios)
7. Sunday air travel hits record: TSA (The Hill
8. Maximizing AI’s economic, social, and trade opportunities (Brookings)
On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
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MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
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MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodities trades.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents.
U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
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Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Robert I. Cahill, Partner Rob.Cahill@wfafinet.
Jonathan D. Soden, Managing Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Senior Account Administrator Jay.Knight@wfafinet.com