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Touch of Grey

Touch of Grey

April 11, 2024

"Every Silver Lining's Got a Touch of Grey"

I've recently been drawn to these immortal lyrics from Robert Hunter. Made famous by the Grateful Dead in the band's only top-40 single in its 30+-year career, I've found them to encapsulate what's happening in the markets today. There are a number of things to be optimistic about today--silver linings, if you will. At the same time, yesterday's hot CPI report show that some touches of grey remain... 

Silver Linings:

  • Inflation: As measured by March CPI, inflation is currently @ 3.47% on a year/year basis. This is down from a peak of 8.99% in June of 2022. (Source: US Bureau of Labor Statistics)

  • Employment Situation: As of March 2024, the US unemployment rate is 3.8% and has been at or below 4% since December of 2021 (28 months!) after peaking at 14.8% in April of 2020 during the height of the pandemic. Weekly jobless claims are currently running just over 200,000 per week--which is in line with jobless claims pre-pandemic. (Source: US Bureau of Labor Statistics)

  • Wage Growth: the March employment report showed the pace of wage growth slowing to 4.23% y/y from 4.57%y/y in February. Wage growth peaked at 5.92% in March of 2022 and has been in steady decline since. (Source: US Bureau of Labor Statistics)

  • Quit Rate: As of March 2024, the quits rate has held steady at 2.2% year/year since November of 2023 (5 Months). The Quits rate peaked at 3% year/year in April of 2022. If we continue to see declines in Wage growth + flat-to-lower quits--the disinflationary trend should continue. (Source: US Bureau of Labor Statistics)

  • Corporate Earnings: The Q1 estimated earnings growth rate for the S&P is 3.2% year-over-year. If this number holds, it would mark the third-straight quarter of year-over-year earnings growth for the S&P 500 (Source: FactSet). The full year earnings growth estimate is 11% and has been creeping up for the last year or so. Ever wondered why stocks have performed as well as they have? Corporate earnings are your answer. Corporate earnings get started tomorrow in earnest with the major US banks all slated to report. (Source: Factset)

  • Stock Market Performance: As of this writing, the S&P 500 is up a shade under 10% year-to-date and just under 30% over the last year. The index is also 15.52% higher since January 3, 2022, DESPITE the spike in inflation in 2022. As it turns out, supply/shortage induced inflation and higher interest rates are good for corporate earnings. Furthermore, US-based companies did a masterful job of remaining patient and navigating the higher-inflationary post-COVID environment. (Source: Yahoo Finance).

Touches of Grey:

  • Inflation: Despite the progress that has been made on inflation since mid-2022, there has been a slight pickup in inflation to start 2024. CPI is currently running @ 3.47% year/year which is up from 3.11% in January and 3.17% in February, respectively, thanks in large part to Owner's Equivalent Rent and Auto Insurance. Is this the start of a new, inflationary cycle a la 2021-2022? Turns out inflation is really hard to predict--only time will tell. (Source: US Bureau of Labor Statistics)

  • Corporate Earnings: Full year 2024 S&P 500 corporate earnings are projected to grow around 11% year-over-year--a figure which has crept up over the last year or so. The earnings projection seems a bit high to me on the surface and, if so, there will most certainly be a pickup in equity market volatility at some point. (Source: FactSet).

  • Interest Rates: With the uptick in inflationary data to start 2024, I suspect that the Federal Reserve will move slower than previously anticipated to cut rates. That said, interest rates could potentially remain higher for longer which will continue to hinder transaction activity in corporate and residential real estate, among other areas.

  • Bond Market: While bonds will continue to pay higher yields for longer and provide some level of diversification of stocks, it is possible that there is more risk to the downside for bonds if inflation continues to trend higher.

In Closing:

We've made tremendous progress on inflation in the last 18 months or so. Inflation, unfortunately, was never going back to the Fed's 2% target in a straight line and it will likely be a bumpy road from here forward with fits and starts along the way. At the same time, most "experts" have and continue to underestimate the strength and resilience of the US economy which has remained at full employment and shown tremendous corporate earnings growth and GDP growth over the last seven quarters.

There are many "advisors" out there trying to push narratives of a new investment environment or regime--don't take the bait. Regardless of the headlines of the day or what the cable news might try to tell you, remember that the S&P 500 experiences an average intra-year drawdown of 14.2% (after yesterday, this years' max drawdown is a paltry 2%!). Furthermore, every year we should expect three 5% corrections and one 10% correction. A bear market, like the one we saw in 2022, tends to occur once every 3.5 years. Volatility is a feature of markets, not a bug, and is, for all intents and purposes, the price of admission when it comes to earning investment returns over the long run. 

We'll continue to deal with tough times as they come and remember the timeless words of Robert Hunter throughout:

"We Will Get By, We Will Survive"

I hope everyone is enjoying the welcome return of spring. Thank you for reading!

Will