Investment Comment
12th April 2024
Spring forward
The US economic outlook continues to improve. The chances of a recession recede as leading indicators and economic data point to a surprising resilience. The clearest indicator is the troughing of the Institute of Supply Management (ISM) survey. The ISM Manufacturing survey reflects that, in the US, the weakness in growth in manufacturing sectors is coming to an end.
There are pockets of weakness, but 2024 economic growth forecasts for the US have moved significantly higher over the past few months (based on GDP (Gross Domestic Product)). Other economies remain relatively stagnant with very subdued economic forecasts.
The Institute of Supply Management (ISM) survey suggests that activity in the manufacturing sector is troughing
Source: Artorius, Bloomberg
Economist forecasts for 2024 - economic growth rate for various economies
Source: Artorius, Bloomberg
Alongside stronger US economic growth, inflation has also proved to be surprisingly stubborn to fall further. With rising commodity prices, especially oil, there is less disinflation than was the case, so the pace and extent of inflation’s declines in coming months may stall. Strong economic growth data and persistent inflation present the ultimate bind for central bankers: any premature celebrations of victory over inflation would damage their credibility and de-anchor expectations. Alternatively, further hikes may drive the economy into recession.
The market has shifted its expectation of seven interest rate cuts though 2024 at the start of the year to expecting only two interest cuts now. If inflation proves to be stickier and the economy more resilient, as it has been over the past year, then the Federal Reserve may feel comfortable in delaying any policy shift still further.
Polarisation of the economy leading to a polarised politics?
The outlook is brighter, but the shift in economic growth is increasingly focussed on the higher income cohort of the population. Signs of consumer distress are showing up in younger and less well-off parts of the US population, much like in the UK. Economically though this cohort is less influential than the wealthier consumer groups, and for the time being the wealthier consumers are showing no evidence of distress. While all income areas now have delinquency rates slightly above pre-pandemic levels, this rise is the most pronounced for borrowers in the lowest-income areas, shown on the light blue line.
In the US, borrowers with lower incomes are struggling with meeting debt costs, resulting in delinquencies rising most sharply in low income areas
Source: Auto Loan Delinquency Revs Up as Car Prices Stress Budgets - Liberty Street Economics © 2024 Federal Reserve Bank of New York. Content from the New York Fed subject to the Terms of Use at newyorkfed.org
In the US, younger borrowers are struggling with meeting debt costs: Transition into Serious Delinquency (90+ days) for Auto Loans by Age
Source: New York Federal Reserve
US Election: it does matter… but not to the market
The increasing gap between the economic experience of the not-so-well-off and everyone else increases the risk that a populist approach to US policy may make a comeback. The November election is a re-run of Biden and Trump. Given the strength of the economy and resultant low unemployment and rising wages, it is somewhat telling that the opinion polls are virtually neck and neck in national polling. The concern for those seeking a continuation of consistent policy emanating from the White House, is that Trump leads in the Electoral College.
Both the Republican and Democratic parties have changed significantly from what they were even as recently as a decade ago, much less several decades ago. A larger proportion of the Republican Party’s voter base is “blue-collar,” lower-income, less-educated segments of the population—cohorts generally less interested in deregulation, tax cuts, free trade or fiscal and monetary policy orthodoxy than the typical Republican voter under Eisenhower or Reagan. The Democratic Party has enjoyed greater support from college-educated “elites”, including in the areas of business, finance and technology, and has become more pluralistic than its working-class origins in the 1930s or 1940s. Accordingly, its policies are no longer as “anti-business” as was once commonly believed.
The impact of inflation, especially food and petrol, is hitting poorer households disproportionally leaving a cohort that is feeling worse off than the headline numbers suggest and so may vote for an alternative to the incumbent. Their economic impact may be more limited than the more wealthy, but one person, one vote means that poorer households still matter politically.
Historically, investment outcomes between a Democrat or Republican presidency are relatively small. Between 1961 and 2023, investing into US equities has proven a source of wealth creation. Under Republican presidencies the US equity market has risen 10-fold. Under Democrats equities have risen 50-fold. And for those willing to stay invested regardless of the President, US equity markets have risen 500-fold. However, the stated policy and personality difference between Trump and Biden suggests that history may not be repeated.
In essence, a Biden presidency would largely represent continuity, and potentially a more predictable policy path, in our view. We expect this would prove less disruptive for investors. A Trump presidency potentially creates more uncertainty which, after the dust has settled, could see both positives and negatives for investors. And the complications of a president with a split congress could see an outcome that falls somewhere between the two.
Non-US matters
Whilst the US economy has proven to be resilient and robust, both the UK and European economies have struggled over the past few years. With inflation pressure easing in the UK and Europe, unlike in the US, the chances are that the Central Banks (Bank of England and the European Central Bank) could end up cutting interest rates before the US’s Federal Reserve. This may stimulate stronger economic growth if lower interest rates combined with lower inflation results in increased consumer spending.
Gerard Lane Chief Investment Officer
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All expressions of opinion reflect the judgment of Artorius at 12th April 2024 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
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