01 Jul A Soft Landing?
“Greed is Good!” – Gordon Gekko
Was Cassandra right? Interviewed by TLR on February 18th, Cassandra predicted that the Federal Reserve would successfully fine-tune America’s economy and achieve a soft landing. She dismissed pundits’ warnings of an imminent recession and scoffed at a financial Armageddon. Her forecast was that America’s economy would continue motoring along, which is what it has been doing. The S&P 500 stock index is up by over 16% in 2023 (and the tech-heavy Nasdaq 100 Index is ahead by more than twice that amount)! Despite “sure signs” of an impending recession that include an inverted yield curve that has not been this deeply inverted or for this long since the early 1980s, an extraordinary 14-consecutive month decline in the Conference Board’s Leading Economic Indicators, unprecedented Quantitative Tightening and interest rate increases by the Fed, an ongoing Crypto Winter, the Regional Bank Crisis, the Debt Ceiling debate, and fiscal deficits for as far as the eye can see, America’s economy continues to expand.
How can that be?
A primary engine for America’s continuing economic boom has been Statist intervention spending via the potent combination of Trumponomics and Bidenomics, each of which injected trillions of Federal Dollars into the economy. The Trump tax cuts that kicked in at the beginning of 2018 and the two Administrations’ massive stimulus packages were not one-offs. They are continuing to wend their way through the economy. The last 2-1/2 years alone have seen $1.9 trillion in COVID stimulus, $370 billion from the Infrastructure Investment and Jobs Act, $240 billion from the Inflation Reduction Act, as well as executive orders, administrative decisions, Ukraine support spending, and mandated delays in Student Loan repayments that in total have poured an additional >$1 trillion into the economy. These outlays have supplemented business operations and provided consumers with additional money-to-spend. The fact is that the U.S. has enjoyed the strongest post-pandemic recovery of any major economy, with the highest level of growth and the lowest inflation. In early 2021, the Congressional Budget Office projected that it would take until 2026 for unemployment to fall below 4% – the U.S. reached that level in 2021.
And the beat goes on! Worker shortages have led businesses to retain employees, avoiding actions that could stunt growth and presage a recession. Businesses are loath to repeat their COVID layoff mistakes. Although interest rates have been rising, homeowners and businesses previously took advantage of historically low rates and financed multi-year mortgages and loans. Higher rates therefore have not had the expected impact on individuals and businesses. Significantly, there is no evidence (yet?) of the kind of wage-price spiral that bedeviled the 1970s. Moreover, Americans are confident that, whatever happens, the Fed will maintain America’s economic equilibrium. Above all, America’s economy continues to hum: the Fed’s inflation fight has caused little pain and shown real progress; housing prices have held up extraordinarily well and again are on the rise; despite the Ukraine War, energy prices have moderated and energy supplies have been resilient; the AI revolution has begun and shows every sign of gaining real economic traction which, if true, will further boost growth and earnings; America’s stock markets continue their steady march higher; and companies’ earnings are increasing.
America’s economic activity also is being driven higher by a generational effect that is materially lifting stock prices, an effect grounded in greed. Yes indeed, greed is good!
Younger generations of investors today care little about fundamentals. They find the underlying value of companies to be irrelevant. Their focus is on price momentum, recognizing that the most successful investments of the 21st Century have been companies with the highest market capitalizations: Apple, Microsoft, Alphabet, Nvidia, Amazon, Meta and Tesla (the “new FAANGS”). Each has been a “momentum stock,” and it is that momentum that has attracted generational buyers together with waves of buying from passive investment funds that periodically re-weight indices by investing in companies that are appreciating in price. If a company’s shares have been making new highs, then those shares have been more likely to continue making new highs. “Breakouts” and “corrections” each have been buying opportunities. New highs have led to newer highs. And the fact is that investors who have been chasing momentum have been rewarded. Those who ignored momentum have been consumed by FOMO – the Fear of Missing Out. Few under the age of 40 have resisted and those over 40 have seen their retirement monies climb as well, invested as they have been in passive mutual fund strategies. Why should anyone resist the ever-upward momentum? The bursting of the 2001-02 Dot-com Bubble and the 2008-09 bear market had little economic impact on the majority of today’s investors. The fact is that those who invested after 2008 have ridden the market higher and higher. Today’s investors fear missing that upside …, a fear supported by experience. They justifiably have faith in America’s stock markets, faith in the “economic put” exercisable by the Federal Reserve, faith in a robust and efficient American economy, and faith in America’s government to provide whatever economic stimulus might be needed. Cassandra has been right!
TLR nevertheless must add a cautionary note by quoting noted economist Herb Stein: “If something cannot go on forever, it will stop.” The economic cycle has not been repealed. It is true that America’s economy isn’t so cold today that earnings look set to tank and not so hot today that the Fed will be forced into a economy-busting rate-increase cycle. America therefore is experiencing “Immaculate Disinflation.” Money remains plentiful and there is no better place for it than the ever-rising stock market. Yet, the doomsayers are not wrong in predicting an eventual recession …, with “eventual” undefined. America currently is experiencing a Federal Reserve-managed “soft landing.” Fingers are crossed that the Fed’s efforts continue to be successful … and for many years to come.
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Finally (from a good friend)