economy: STICKING THE LANDING
by Jason Norris, CFA Principal Equity Research and Portfolio Management
Ferguson Wellman Capital Management
The past year not only defied predictions of a U.S. recession but also turned out surprisingly well for investors with positive bond returns and a recently broadening advance for blue-chip stocks that pushed bench- mark equity returns above 20%. As the title of this piece suggests, we are anticipating a favorable out- come to the Federal Reserve’s inflation fighting campaign that is seeking to bring price gains to heel while not derailing corporate profits or tip- ping the economy into recession. Higher interest rates engineered by the Fed have so far succeeded in reducing excess job demand without causing widespread joblessness. In turn, wage gains and inflation are moderating, and with unemployment remaining near generational lows, the consumer remains gainfully employed. Consumer debt is up notably from pre-pandemic heights to record lev- els, but persistently strong home prices and a resurgent stock market have boosted key sources of wealth. Also, healthy wage gains have al- lowed the U.S. consumer to manage these debt levels. As the chart be- low illustrates, revolving consumer debt (credit card, auto, student loan, etc.) is up 30% the last three years to a record $1.3 trillion. However, due to healthy wage gains over this period, the percentage of debt relative to income is still below levels leading up to the pandemic and 30% be- low levels in the early 2000s. With consumer spending making up 70% of the U.S. economy, a healthy consumer all but ensures an expanding economy … as long as that consumer remains employed.
will have lower rates to get back to “normal.” However, we do not believe there will be an immediate hurry to start cutting as they do not want to repeat the mistakes of the 1970s. While optimistic about the economy avoiding a “hard landing” and laps- ing into recession, we trimmed our allocation to equities last fall and recently redeployed proceeds to bonds … which have now earned a higher (now neutral) allocation in client accounts. After over a decade of historically low interest rates, yields have moved back to “normal” and bonds offer the best value they have since before the 2008/2009 global financial crisis. With equities now trading near 20x expected earnings, the S&P 500 is somewhat expensive, particularly in the context of current interest rate levels. However, key technology-centric earnings drivers such as cloud computing and artificial intelligence can, by our analysis, drive dou- ble-digit earnings growth that is anticipated for the S&P 500 this year. Accordingly, we retain a slight overweight to large-cap U.S. stocks with overweight exposure to some of the technology-driven names. On the other hand, acknowledging later cycle dynamics, we are underweight both U.S. small cap and international emerging market equities. Jason Norris, CFA, is a principal and equity research and portfolio man- ager at Ferguson Wellman Capital Management. Ferguson Wellman is a privately owned investment advisor established in the Pacific Northwest. As of December 31, 2023, the company manages more than $8.4 billion for 990 clients. DISCLOSURES Opinions and statements of financial market trends based on current market conditions constitute our judg- ment and are subject to change without notice. Due to the rapidly changing nature of the financial markets, all information, views, opinions and estimates may quickly become outdated and are subject to change or correction. We believe the information provided is from reliable sources but should not be assumed accu- rate or complete. Reference to or by non-employee individuals and institutions herein does not serve as an endorsement of, or testimonial for, the investment strategies and services of Ferguson Wellman and West Bearing Investments. The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or to buy securities, investment products or investment advisory services. Ferguson Wellman and West Bearing are not qualified or licensed to, and do not, provide tax, legal, insur- ance, or medical advice or services. We may provide referrals for third-party professionals including tax and legal advisors. You are solely responsible for the ultimate selection of such professionals. Ferguson Wellman and West Bearing are not responsible for (i) the appropriateness, quality or accuracy of advice or services rendered by any third-party professional engaged by you, (ii) the implementation, monitoring or updating of any recommendations made by any third-party professional engaged by you, or (iii) the implementation, monitoring or updating of any recommendations made by Ferguson Wellman which are considered or acted upon by any third-party professional engaged by you. You may find links to websites that are not managed by Ferguson Wellman or West Bearing. We do not take any responsibility for reviewing, updating or insuring accuracy of information on other websites. Ferguson Wellman and West Bearing disclaim responsibility for the legality of materials and copyright compliance on other websites. This is provided for informational purposes only. All commenting functions have been disabled as SEC regulations prohibit testimonials. As a result, comments on Ferguson Wellman publications (printed or electronic) are not permitted to be posted publicly. If you have questions or comments regarding the content from our website (including the Ferguson Wellman blog), please contact us at: info@fergwell.com
Consumer Debt…Is Manageable
9%
$1,400
$1,300
8%
$1,200
7%
$1,100
6%
$1,000
5%
$900
4%
$800
3%
$700
Source: Federal Reserve Bank of.SLtouis
With inflation now forecast to fall near the Fed’s 2% goal in 2024, mar- kets have begun anticipating rate cuts as soon as this spring. If the Fed ultimately achieves the “soft landing” now being discounted by stock prices, it may lower rates not because economic activity is waning, but rather to pre-emptively avoid a recession precipitated by keeping rates too high for too long. Historically, the Fed has kept the Fed Funds rate roughly 2% above the inflation rate, therefore, at current levels, the Fed
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