January 08 2024

Looking For the Exits

US GDP growth is nothing to be frown at, posting 4.9% in 3Q23. Something that most of the world would look at with envy. While pundits still argue about the tenderness of the economic landing, with all variations from soft to hard, two things are true at the same time: (1) On average the economy powers ahead, turbo-boosted by services, and (2) rolling recessions are taking place in several areas, notably real estate, small businesses, and low-income households.

Cooling, cooling, cold. As the captain of a ship heading for the iceberg, Jay Powell and his crew pivoted away from higher-for-longer rates. Indeed, inflation cools down a lot faster than expected, along with resilient employment, warranting a change of course.

Indeed, it looks like inflation is falling off a cliff, with core PCE shockingly dropping from 5% to 2% QoQ in 3Q23. I don’t know you, but it definitely looks like inflation was nothing but T.R.A.N.S.I.T.O.R.Y. in retrospect.

Looking ahead, the outlook for capital spending has deteriorated significantly, while Leading Economic Indicator (LEI) from the Conference Board is still pointing to a major contraction. There is nothing soft to this landing.

Yes. No. Maybe. No surprise that markets flip-flop. The equity rally has been nothing short of breath-taking, since the Fed conceded “victory” over inflation. As valuations inflate past the post-covid highs, over-bought signals flash orange, and the high-flying party is pragmatically checking whether there is still fuel in the engine. Mainly, the wary eyes will look to corporate earnings and other fundamentals for extra fuel. Until this data comes, locate the exit.

The safest place on earth is on the ground. Yes, bonds are back. Fixed income should benefit most from the ongoing economic scenario.

  • Rates have peaked, providing both a good carry and a potential for narrowing discounts. Whether the narrative spins from “if Fed cuts” to “when Fed cuts” to “How Fed cuts” to “Why Fed cuts”, rate cuts benefit bondholders, full stop.
  • Credit spreads have become rapidly tighter, and it is an issue. That’s why investors would find more comfort into higher quality investment grade bonds.
  • Economy is likely to soften in the US, joining the chorus of “massive slowdowns” rearing their ugly heads in the UK, or Germany to name but two. Short of outright defaults, bonds offer better ballast to such scenario.

As per Goldman Sachs, investors are gradually extending their bond duration, while flows toward fixed income are increasing. Short of a massive sell-off opportunity in equities, bonds offer a better value proposal to the $6tn money market treasure chest waiting on the sideline. Just saying.

Stay safe out there !

About –

360 Advisory LLC is a Boston-based RIA managing investments