May 2024 Market Outlook
Weakening Signs?
The first hint of labor market deceleration we’ve had for some time appeared in last Friday’s employment report. It showed the economy added 175,000 jobs in April, a sharp drop from 315,000 in March. The unemployment rate rose to 3.9%, up 0.1%, though still holding the 3.7-3.9% range it’s been in since August 2023. Leisure and hospitality were hardest hit with 5,000 jobs added in April versus 53,000 added in March.
Average hourly earnings (wage growth) fell to 3.9% vs. 4.1% in March. Wage growth has declined steadily from a high of about 6% in April 2022. The Fed is in a difficult position though, managing to lower inflation while this wage growth rate remains quite high. Hence their conclusion last week to leave rates unchanged.
US Average Hourly Earnings YoY – source Bureau of Labor Statistics
Another weak number came out Friday with the Institute for Supply Management (ISM) survey for April. The survey reported service-sector activity falling into contraction territory for the first time in 15-months. This survey tracks employment, new orders and business activity trends. Services is the largest segment of US economic production so this survey is an important gauge of economic health.
In the face of these weakening indicators, personal consumption expenditures (PCE) showed continued strength, rising in March to 2.7% from 2.5%, and eliciting cries that inflation is not only stalling out but may in fact be rising. We think that is a premature conclusion. These cries are from many of the same economists that made rosy Q1 forecasts of 3-6 rate cuts in 2024. Most forecasters have now faded their prognostications to 1 or 2 cuts and some are declaring the next Federal Reserve move is a rate hike. This tells us something about the accuracy of big bank and broker dealer forecasts (i.e., they’re usually wrong and often by a wide margin, as in this case). We were skeptical of those calls back then and are equally skeptical of pending rate hikes now.
US PCE Price Index YoY – source Bureau of Economic Analysis
In our simple view, inflation has come down steadily from its pandemic high but at this point is proving, unsurprisingly, sticky. As such, it’s only a matter of time before consumers pull back spending more significantly if wages continue to stall. The cost of basic goods and services is frustratingly high for most Americans. Consumer spending is by far the biggest driver of the US economy, representing nearly 68% of GDP in Q1 2024 according to the Bureau of Economic Analysis. So a moderation in consumer spending and subsequent recessionary rumblings would not be surprising.
The Fed doesn’t need to make any rate changes while we continue to have fairly stable growth and inflation numbers. We previously pointed out that, historically, the US economy has grown just fine with interest rates around 5%. The Fed announced Wednesday that they will keep the Fed Funds rate unchanged but slow down the reduction of their balance sheet. This simply means it has another tool in its arsenal to keep liquidity in the banking system and continue fueling the economy, without making rate changes. The stock and bond markets liked that announcement. Stocks bounced back from a recent modest 5% pullback and 10-year US Treasuries dropped from 4.65% to 4.50%.
In line with this rebound, Barron’s Big Money Poll came out this weekend showing “52% of poll respondents said they were bullish about the outlook for stocks over the next 12 months, up from 38% last fall, with another 33% describing themselves as neutral. About 15% said they were bearish, down from 24% last fall.” So the investment “pros” remain confident that the horizon is pretty much blue skies.
We are a bit more cautious about the future. We like the near-term market outlook and agree stocks can rally further, especially given the nearly $6 trillion cash on the sidelines. But looking beyond the short term we believe the stock market is in the process of creating a long term top that potentially could peak this year. We would not be surprised if the global equity markets enter a real bear market in 2024. Some reasons are as follows:
The US market has priced in high equity valuations (see the Buffet Indicator Model below), and the expectation that corporate earnings will continue to grow unabated. There are precious few calls for a recession while, at the same time, huge expectations that Artificial Intelligence (AI) will be the catalyst that cures all ills. We think this needs a healthy dose of discounting.
Rising global tensions put the US in a tenuous position as the dominant power to counter threats from Russia, China, Iran and the Middle East among others. These threats pose the possibility of both armed conflict across multiple regions, and technology threats targeted at crippling the US in government and corporate sectors wherever possible. As an example, ransomware attacks worldwide rose an estimated 74% in the past year according to a recent report by the National Intelligence Agency. The US is not well positioned to be the global cop anymore and public support of this role is fragile at best.
National unrest, US political polarization, a divisive presidential election this year, and the rising threat to personal liberties in our nation may not serve as triggers to a turn in the markets but certainly can add fuel to one.
The following table from the Global Economic Forum lists these and other risks that are top of mind to analysts around the globe:
In summary, we think it prudent to consider that some of these concerns will manifest this year, though of course we would be glad if somehow they can be averted. As a result, we advise using caution in investing by making sure high-rated fixed income securities (government and investment grade credits) comprise a significant percentage of investable assets, and that equities holdings get progressively reduced as the stock market rises further. Percentages vary based on individual circumstances and we would be happy to provide some direction on that. But big picture, taking money off the table sometimes can be good medicine.
In bonds, we continue to find yields above 6% in US government guaranteed mortgage back securities. We believe these represent excellent value. In US government agency and high grade corporate bonds we are finding yields at or close to 6% in 1-3 year maturities. Sprinkling in longer dated maturities (7-12 year) also continues to make sense whenever a brief rise in interest rates occurs, which of late is often.
Markets recap (April 1 – May 3):
- US Equities -1.0% (SPX, DJX, NDX average)
- Bonds -0.34% (GVI Short Intermediate Bond Fund)
- Bitcoin -11.0% (GTBC ETF)
- Energy -2.67% (XLE ETF)
- Metals +4.21% (GLD and SLV ETFs)
- Agriculture averaged -2.09% (GLG and VEGI ETFs)
As ever, contact us at info@atlasfas.com if you have investing questions or needs, or call (703) 980-7038 or (561) 704-0400.
Good investing!
Disclaimer
The information presented in this document has been obtained from or based upon sources believed by Atlas Financial Advisors, LLC (“Atlas”) to be reliable, but Atlas does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this document. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view. Any headings are for convenience of reference only and shall not be deemed to modify or influence the interpretation of the information contained.
This information is not investment research or a research recommendation, as it does not constitute substantive research or analysis. It is provided for informational purposes and does not constitute an invitation or offer to subscribe for or purchase any of the products mentioned. This document is not to be relied upon in substitution for the exercise of independent judgment.
Observations and views expressed herein may be changed by the personnel at any time without notice. This document is not to be reproduced, in whole or part, without the written consent of Atlas.
April 2024 Market Outlook
A Tale of Two Markets: Strong Economy, Sticky Inflation
We begin April and springtime with US debt, equity and currency markets focused heavily on when the Fed will cut rates, having seen Wall Street economists at every wire house progressively trim their estimated number of rate cuts for 2024. The sticky inflation and employment data of the past few months gives good reason for some tempered enthusiasm. Interestingly, there is virtually no discussion or expectation that the Fed might not cut rates at all this year. I find this puzzling given some of Fed Chair Powell’s comments. After the recent PCE numbers Powell noted that “we don't see it as likely to be appropriate that we would begin to reduce interest rates until the Federal Open Market Committee is confident that inflation is moving down to 2% on a sustained basis,” noting that the Fed would need to see "more good inflation readings like the ones we were getting last year." With the US economy still growing steadily and employment remaining strong, getting numbers like last year is no small order.
In terms of positives for the US economy, however, here are a few points to consider:
Unemployment has remained fairly close to its historic low (current 3.9% vs. Jan 2023 low of 3.4%) in spite of 11 increases in the Fed Funds rate from March 2022 to July 2023
Job openings are still significantly higher than pre-pandemic levels (26% above, according to an Indeed data report)
US consumer spending has grown steadily over the past year, accounting for 68% of our nation’s GDP as of the end of 2023
In February 2024, consumer spending rose 0.8%, the largest gain since March 2023, indicating there has been little pullback in spending in spite of the fairly painful rise in the cost of goods, services and housing over the last year plus
US home sales jumped 9.5% in February and the median existing home price rose 5.7% over the last year (good news for homeowners, at least… not so good for buyers)
Fed data shows wealth among the bottom half of US families rose by almost 75% since the first quarter of 2020, and remains strong
Small businesses, which are responsible for nearly two-thirds of all new job postings, continue to show strong demand for labor as new-business applications rose 34% from 2021 to 2023 and are up since the start of 2024
Labor force participation (working-age population either working or looking for work) has remained steady at 62.5%, unchanged from a year ago
If interest rates continue to hold in a range between 4.0-4.5% on the 10-year US Treasury note, then continued solid economic data can provide further fuel for equities markets to rise and indeed to broaden out to more stocks than the short list that benefited from the rally in 2023.
But it’s not all roses out there. Some darker clouds to consider:
Real wages are falling (the amount people are paid when adjusted for inflation)
While nominal wages have risen by around 10% since Biden took office in January 2021, overall prices have increased 14% resulting in a net wages loss of 4%; further, the decline in real wages has hit virtually every major sector of the economy, meaning Americans are working more hours for less pay and retirees are getting less for their hard earned savings
Housing affordability has worsened significantly; the median mortgage is twice that of 2013 and has increased $1400 since 2020, while affordability is 40% worse than 2022
Median home prices are now 6 times median income vs. 4-5x 20 years ago, while the ratio of rent to median income has risen 25-30% over the last 2 decades (Econofact article “Hitting Home: Housing Affordability in the US”, 3/14/24)
US household debt is at an all-time high of $17.3 trillion (this includes home mortgages, home equity loans, auto loans, credit cards, student loans and retail cards), and consumers have registered negative savings for the last 5 quarters
The Consumer Expectations Index has fallen below 80 (March @73.8; 1985=100), which historically is associated with a forthcoming recession
Average childcare costs are up 32% since 2019, which doesn’t include the effect of pandemic-era funding that ran out last September (i.e., costs should rise further)
Auto loan delinquencies hit a 13-yr high in Q4 2023 at 7.7% (no 2024 data yet)
The US personal savings rate fell to 3.8% in January vs. the long term average of 8.48%
The commercial office vacancy rate of 19.6% is the highest since at least 1979 (WSJ 1/8/24)
And of course, geopolitical threats in Europe, Asia and the Middle East haven’t budged, US debt continues to balloon to unsustainable levels, and US political division is just starting to ramp up to new heights with the 2024 elections.
So what does this portend for the bond and stock markets and how should we position investments?
Bonds
Bonds continue to provide value and good risk mitigation for diversified investment portfolios. With the stall in the Q4 2023 bond market rally, and modest back up in 10-year rates from 4% to 4.30%, we have been able to increase holdings in AAA-rated, monthly-pay mortgage backed securities at 6% yield and higher, AA and AAA rated municipal bonds with taxable-equivalent yields above 6% (10-year and longer maturities), and investment grade corporate bonds with yields between 5.50-6%. Coupling these investments with a smaller holding of US T-bills and money market funds – instruments that offer yields around 5.25% along with high liquidity for when more compelling investment opportunities arise - the fixed income space is rightly earning larger percentages of professionally managed portfolios. Predictable income at rates we haven’t seen for over 15 years continue to underscore the value of having a meaningful percentage of assets in these securities. Remember the rule of 72: your money at a fixed annual rate of 6% doubles in 12-years, and slightly over 10-years at a 7% rate (divide 72 by the fixed rate of return to get the number of years for your initial investment to double). We have been investing in bonds at 6% to 7% since last October.
Stocks
The up-trend in both US and major international market equities continues with the S&P 500 up 10.2% for the first quarter of 2024. Barron’s weekly noted that the index has gained over 8% in the first quarter of a year only 16 times since 1950. In 15 of the 16 times the index gained an average of 9.7% in the following 3 quarters of the year (the 1987 crash being the exception where it lost money after the first quarter). The takeaway is a start like we have had in 2024 has over a 90% likelihood to gain further ground the rest of the year, barring a black swan event which isn’t out of reach given geopolitical uncertainty and US political and social disfunction.
It’s also worth noting, however, that all 3 major indices have begun to lose momentum. This is why we recommended last month to shift a portion of equity allocations to fixed income, commodities and bitcoin (bitcoin we have been recommending to have a small percentage of since last fall). Given the unabated rise in the S&P from 4100 last October to over 5200 today, the potential for a 10% pullback to around 4600 isn’t unreasonable. This doesn’t mean the current secular bull trend has broken down. From the October 2022 low of about 3500 we had 3 sharp pullbacks of -8.1%, -9.4% and -10.4% on the way to the current all-time highs. We would need to see a string of weaker economic numbers to give credence to a top in the equities markets.
How did our March Outlook suggestions do?
We recommended lowering equities holdings to 45% for those with over 50%, and increasing fixed income to 45%. We also suggested having 5% in bitcoin and 5% in commodities (by commodities I mean energy, metals and agriculture ETFs). Here are some indicative figures, as of last night’s close (4/1/24):
The 3 major indices (SPX, DJX, NDX) averaged +1.24%
I-Shares short/intermediate/long bond ETFs averaged -0.80%*
Bitcoin gained +14.52%
Energy (XLE ETF) gained +8.90%
Metals (GLD & SLV ETFs) averaged +5.3%
Agriculture (VEGI & GSG ETFs) averaged +2.52%
*Note: Atlas does not invest in bond ETFs, rather individual bonds where we are able to find higher yields than ETF averages, offering us the opportunity for outperformance vs. bond indices. We like the cushion our fixed rate returns provide to overall portfolios.
We wish you good investing and contact us if you have any questions or comments at info@atlasfas.com, or call us at (561) 704-0400.
Disclaimer
The information presented in this document has been obtained from or based upon sources believed by Atlas Financial Advisors, LLC (“Atlas”) to be reliable, but Atlas does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this document. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view. Any headings are for convenience of reference only and shall not be deemed to modify or influence the interpretation of the information contained.
This information is not investment research or a research recommendation, as it does not constitute substantive research or analysis. It is provided for informational purposes and does not constitute an invitation or offer to subscribe for or purchase any of the products mentioned. This document is not to be relied upon in substitution for the exercise of independent judgment.
Observations and views expressed herein may be changed by the personnel at any time without notice. This document is not to be reproduced, in whole or part, without the written consent of Atlas.
March 2024 Market Outlook
This month we are providing a Summary of our Market Outlook for those interested in the Reader’s Digest version, followed by further drill-down for those that want to dive deeper. We hope this fits all and we welcome your feedback.
Summary
With the rising confirmation that the Federal Reserve is not cutting rates anytime soon, and that the cuts will be fewer than the market previously baked in, some equities caution and an increase in bond allocations is merited. We have to chuckle at how nearly every major brokerage house has back peddled on their forecasts and removed multiple rate cuts from their prognostications. We didn’t buy the rosy rate cut forecasts back in November and we still believe they will be less the market expects.
With the recent significant run-up in stocks and small backup in interest rates, we recommend shifting asset weightings with a tilt more to bonds, especially for those with a 60/40 or higher stocks-to-bonds allocation. The secular bull market in stocks is still intact. But a pullback and consolidation is warranted. With market breadth now expanding beyond the Magnificent-7 we look at this as an opportunity to take some gains and buy back on dips. But choppiness in equities markets will likely reign for some time given the outsized stock gains of 2023 and increased caution on interest rate cuts. Bonds still represent excellent long term value, if you know where to look. Hence our recommendation to increase this holding percentage.
For those with a 60/40 or higher equities ratio in their portfolio, we recommend shifting to a 50/50 allocation (stocks/bonds) or just increasing cash that currently pays above 5%. We think a couple of other sectors are advisable as well for additional diversification (see allocations, below). US small cap (e.g., Russell index) and international stocks are beginning to catch up to the major US indices and we believe these will continue to gain relative ground. A modest portion of your equities holdings in these sectors is merited.
In Bonds, value continues in mortgage backed securities where we still are able to find yields of 6-6.25% for AAA-rated securities. These bonds are a great way to add a relatively high and stable return to an investment portfolio. When we first started recommending MBS bonds last year the yields were 6.5-7% and above. At 6-6.25%, they are still an excellent investment.
US agency bonds (AAA) also offer 6% yields in 5-year maturities with a non-callable provision for 1-year. Lower investment grade corporate bonds with several years call-protection are also available at 6% and higher yield, and mainly AA-rated (some AAA) municipals in 5-10 year maturities are offered at over 6% taxable equivalent yield.
Commodities have been stuck in a narrow sideways range for the last year and a half, after a 30% drop from the early 2022 supply-chain bottleneck peak. The divergence between stocks and commodities has reached one of the widest gaps in history, with the S&P 500 at the top of its 2-year range and commodity indices near the bottom. A modest allocation to a broad commodities ETF makes sense for risk diversification and value, especially where a meaningful dividend or carry yield can be had. The iShares Commodity Curve Carry Strategy ETF (CCRV) is a way to participate in 10 different commodities via the futures market. This ETF’s performance since inception has been solid and it’s current yield is above 7%. For details see https://www.ishares.com/us/products/310784/ishares-commodity-curve-carry-strategy-etf-fund.
Lastly, for a number of months we have recommended having some allocation in Bitcoin. We continue to believe this is a good diversification strategy even with the recent run-up in price, though we recommend waiting for a lower entry point on a pullback. Bitcoin wallets are now in the millions and likely will continue to grow, structural support continues to strengthen, and with a finite number of coins (as opposed to the limitless printing of fiat currencies) Bitcoin represents diversification with the potential for outsized gains on a small allocation.
Periodic portfolio adjustments are part of a successful investment management strategy to reflect changes in market value, inflation, global economies and geopolitical events. Based on the observations above, we deem the following allocations to be a prudent example of diversification, growth and value at this time:
· 45% stocks (across US and International index ETFs)
· 45% bonds (across MBS, corporate and muni securities, with concentration in MBS)
· 5% Bitcoin (via a wallet or Grayscale ETHE ETF)
· 5% commodities indices (ETFs)
A tweak of this to 40% stocks – and moving the incremental 5% to cash which continues to pay an attractive rate of 5-5.25% - diversifies risk a bit further and provides dry powder to buy back into stocks on a pullback. Of course, individual financial needs and circumstances vary and need to be incorporated in any investment planning.
Atlas is able to help you assess your current portfolio allocations and make adjustments to align with your investment and personal goals. Reach out to us if you would like to discuss how we can assist you in your long term financial planning.
Other Takeaways
Labor Supply and GDP
Labor supply has remained strong and continues to be a driver for US economic growth, prompting a number of economists to revise upward their GDP forecasts for 2024. Strong participation rates and especially a huge increase in international migration over the last two years has been a key driver of growth in the labor force. Stickiness of labor costs will keep pressure on headline and core Personal Consumption Expenditures (PCE), slowing the rate of decline to the Fed’s 2% target and prompting a slower rate cut schedule than previously thought. Prior expectations for a March cut have slid to June, which still may be too optimistic (Fed member Bostic recently stated he didn’t expect to see any cuts until September).
US Equities Technicals
Stocks declined today with the Nasdaq overall, and Magnificent-7 in particular, leading the way down. After the heady rise from the early January lows of around 4700 to 5100 on the S&P 500 last week, a pullback is more than warranted.
Support on the S&P 500 is now at 4700 and then 4300, and we expect at least 4700 to be reached.
Are we in a Stock Market Bubble?
Though exuberant for the last several weeks, the stock market does not appear to be in a bubble. Rather just a top after an amazingly resilient run up from last October that took out just about every bear in the market. Ray Dalio offers an interesting commentary in his recent LinkedIn newsletter titled “Are we in a stock market bubble?”. His bubble gauge considers value, sustainability of growth rates, impact of new and naïve buyers, bullish sentiment, percentage of purchases paid with debt, and forward purchases based on a price gain bet. His conclusion? The stock market “doesn’t look very bubbly” even at these all-time highs.
The Case for Higher Stocks One-Year Out
With respect to what has happened to stocks following hitting new all-time highs, a fellow advisor shared some insights from Warren Pies of 3Fourteen Research that are worth noting:
First, since 1954, stocks were higher 93% of the time (14 out of 15) one year after the stock market made an all-time high. The one exception was 2007 when the housing bubble burst, subprime mortgages were defaulting, and the great financial crisis was about to start. As he states, “Do we have conditions in 2024 like conditions in 2007? No, at least not yet.” But past events don’t ensure a repeat either.
Second, rates of return one year after a new high all-time high ranged from +4.9% to +36.9%. In addition, drawdowns (market retracements) were shallower over that next year.
These data points make the case for staying invested in stocks on a long term basis, and having a plan to buy back in if you take profits at these levels.
Market Sentiment
The CNN Fear and Greed Index is back in Extreme Greed territory. It seems like just yesterday that we shared the index reading of Extreme Fear (November 2023). How quickly sentiment can swing! But this gauge continues to be helpful in identifying extremes that merit at least modest portfolio adjustments.
US Dollar & Geopolitics
Lastly, the US dollar recently has been buoyed by a weakening European economy and increasing possibility of lower rates there. Long term, however, the US dollar remains in a precarious position if the US government outstanding debt is not lowered. We discussed this at length in prior Outlooks but the key markers have not changed:
· Total debt: $34.4 trillion
· Debt as % of GDP: 123%
· Rising debt financing costs at current higher rates
· Inability of a polarized government to reduce spending
According to Trading Economics, the US debt rises approximately $1 trillion every 100 days! This is astounding. Debt as a percentage of GDP hit an all-time high of 133% at the end of 2023 and has declined slightly in Q1 thanks to GDP growth. But this time bomb has to be dealt with in stringent ways that Congress has not demonstrated the backbone for in many years now.
Coupling US political polarization with continued threats from Russia and China, and a growing humanitarian crisis in the middle east, we have no shortage of fuel to quickly change market stability. On that note, we adjourn until next month. Good investing and contact us if you have any questions or comments at info@atlasfas.com.
Disclaimer
The information presented in this document has been obtained from or based upon sources believed by Atlas Financial Advisors, LLC (“Atlas”) to be reliable, but Atlas does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this document. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view. Any headings are for convenience of reference only and shall not be deemed to modify or influence the interpretation of the information contained.
This information is not investment research or a research recommendation, as it does not constitute substantive research or analysis. It is provided for informational purposes and does not constitute an invitation or offer to subscribe for or purchase any of the products mentioned. This document is not to be relied upon in substitution for the exercise of independent judgment.
Observations and views expressed herein may be changed by the personnel at any time without notice. This document is not to be reproduced, in whole or part, without the written consent of Atlas.