January 26 2024

Hot Till It Drops

The US achieves best of both worlds with slower inflation, yet a surprisingly resilient economy. The 4Q23 data released this week showed a Core PCE price index at 2% QoQ, bang on Fed’s inflation target. By any measure, inflation has been decreasing, yet some would argue that there are die-hard pockets of strength, notably in lodging costs.

This lower inflation momentum was accompanied by sturdy growth. GDP QoQ punched at 2.8% annualized, with all major categories contributing and consumer spending as the main driver. This has surprised to the upside, as growth was expected to decelerate to 2% from previous quarter’s 4.9%. A more controlled slowdown of sort.

Elsewhere jobless claims ticked higher, at 214k vs 200k expected and 187k prior. Continuing claims pursue their slow ascent. Something to keep monitoring.

Wholesale inventories moved slightly up, while durable goods order flat-lined. Both data points probably hint at some difficulties to move products in certain areas of the economy. Devil is in the details.

Finally new home sales rebounded stronger than expected in Dec23, as financial conditions eased.

In short, a nice cushy bed for the markets to bounce off. Not to mention the positive surprise on the first earnings release, about 25% of the S&P500. Earnings are so far less negative than expected. Call it a glass half full news.

Guess what? Tech is still leading the show, even though Tesla is feeling the heat of EV competition, creating a wedge among the Mag7. Probably time to find a new acronym. Feel free to send you suggestions.

Where does that leave us in terms of yields? The market pushed back its expectation for a rate cut, but is not dissuaded to extend risk-taking in credit and duration. So far, any pull back in bonds has been an occasion to add exposure.

It is all fine and well with the US economy, but what about the rest of the world, home to 96% of the world’s population and 70% of its GDP ?

China is trying to lift the spirits with targeted stimulus, and easing. Now, the Government tide does not lift all boats, and Chinese consumer and investor sentiment remains relentlessly negative.

Investment managers have been talking of “Asia ex-China”, not only to carve out the awful performance of China-related everything, but also emphasize the positive developments in re-shoring for India, Thailand, Vietnam, as well as the bounce back from Japan. Advanced warning: these names at the juncture of US-China trade remain subject to the vagaries of the relationship. In short, it is volatile.

Another place to look for is Middle East and Africa, with UAE and Saudi Arabia as the main contenders, and their herculean challenge of shifting the economy away from their fossil-fuel reliance. It forces them to forge new alliances, certainly with China that is by far their main trade partner.

This urgent quest for new partnerships comes at a time when US imports from OPEC and the Persian Gulf hasn’t been that low since the 1970s, and US Republicans are increasingly unwilling to play the world-peacekeeper role.

Europe is also scrambling for strategic-independence solutions, on defense in particular, even more so that war is literally at its gate.

Where does that leave us in asset allocation? it advocates for more diversification in equity portfolio, with defensives on one hand, and cyclicals on the other hand. I know this is not entirely satisfactory, but we are sitting on the fence on growth and market breadth. Fixed income remains our asset class of choice, as interest are high and will eventually go down. In the words of Amundi, “interests are higher for longer, not forever”. Finally, I’d play gold and EM as hedge against a weaker dollar in the medium term.

Stay safe out there !

About –

360 Advisory LLC is a Boston-based RIA managing investments