Stock Talk - Beyond Inflation in 2024: The Real Growth Concerns for Investors

Starting point is 00:00:00 Investors talk around economist locker rooms centers almost exclusively on inflation, accelerating and running too hot for the Federal Reserve. And what, when, and how many rate cuts will the Fed move on in 2024? To me, those are the wrong questions now. That was the right question to ask three to four months ago before inflation started its normal seasonal upturn in the first quarter. To me, this is no longer the right question to ask. The right question to ask is how much the economy slows down in the second and third quarters based on prior Fed moves. It's something as ailing the markets. It is an inflation. It's the depth and the magnitude of the coming summer slowdown. A summer slowdown or worse? Let's talk about that. Central

Starting point is 00:00:48 banks aim for a soft landing in the economy when they raise interest rates to cool inflation. However, our Federal Reserve has a bad track record historically of accomplishing soft landings during past rate hiking cycles. The current data supporting a smooth landing is mixed at best and will unfortunately not be known until late in the third or fourth quarter of this year. We've discussed prior soft landing cycles before, which is the Goldilocks outcome. The last of these successful soft landings was executed when monetary policy tightening conducted under Allen Greenspan in the mid-1990s.

Starting point is 00:01:20 In 1994, the Fed raised rates seven times doubling Fed funds rates from 3 to 6%. In 1995, they cut Fed funds rates three times when they saw an economy softening more than required to keep inflation from rising. Back then, as measured by the S&P 500, the stock market never pulled back to the 50-day moving average until late August 1995. Will that same thing happen again in 2024? I don't know. Right now, it's possible.

Starting point is 00:01:49 However, the economic setup says it could be late first quarter of 2000, near the peak of the dot-com bubble, or 1995. Let's take a look at the Economic Surprise Index, which we've talked about in the past. As you can see, the Data Series exhibits a normal seasonal upturn in the first quarter as those cautious or slower economic forecasts have been bettered more often than not. However, note the recent peak in the data series is both earlier and lower than previous first quarter peaks. a bit of a warning sign behind the scenes for second and third quarter economic growth. Is that dire? No. It's just probably not as rosy of an outlook for the summer as those talking on TV are trying to imply. Investors, while inflation is the boogeyman that the Fed is trying to slay in the background the last 12 to 15 months, I want to focus on the other side of the coin.

Starting point is 00:02:40 Real economic growth as measured by real-time interest rates, also known as tips. Remember, this is the component of treasury yields that goes a long way in determining the P.E. ratio for stocks and the overall equity risk premium. A lower trending real rate is initially good for P.E.s and good for the market, particularly for high-growth equity stocks. Those stocks were the darlings in the fourth quarter of 2003 and early 2004. However, year-to-date behind the scenes,

Starting point is 00:03:11 things have been changing in sector selection in the market. Take a look at the chart of the 10-year real interest rate. It's not a coincidence that gross stocks like semiconductors, Bitcoin, and AI stocks bottomed again in late 2023 and rocketed higher as the real rate broke its 15-month uptrend and headed lower at the end of 2023 and into 2024. Investors behind the scenes, the market is flashing warning signs that the trend might have gone a little too far too fast and the Fed is too tight with its economic policies. Take a look at the chart of the one-year real interest rate.

Starting point is 00:03:47 It's heading down and to the right as well, which is initially a good thing for growth stocks. However, as one can see, one-year real rates have fallen from 4% back in late third quarter of 2023 to under 1% currently. In fact, it's nearly only 90 basis points, which tells me that the market sees a dramatic slowdown in real economic growth coming in mid-20204. To me, that says the long and variable lags the economists talk about all the time are finally upon us in the U.S. And the Federal Reserve is not too loose with monetary policy, but rather likely too tight. To me, that is what might ail the market right now and some stocks. The market is beginning to struggle a little bit with the Fed staying too tight for too long and causing a hard landing in late 2024 or 2025. Investors, we're currently in a soft landing and it have been for over a year now.

Starting point is 00:04:44 That's exactly why stock portfolios have rallied to make new all-time highs as their team had expected. The $65 trillion question is how long will this soft landing last? And are there early predictive signs behind the scenes that we can see as investors that we are closer to an economic top and a rollover, which would inevitably lead to a recession and a hard landing? Right now, we're sticking with picking stocks for our clients. and single stocks account. The market in 2024 are not the same as they were in 2003. Behind the scenes, many boring stocks and sectors are beginning to work. Investors are beginning to hedge against the Fed making a mistake by lowering their

Starting point is 00:05:26 risk portfolio into what is normally a seasonal slow part of the economy during summer. Investors, math I see behind the scenes, the same math that said 5150 to 5200 on cash S&P optimistically for mid-March, 2024 over a year ago says that should the Fed glide the plane to a gently landing path later in the year, the SP 500 over 6,000 is possible in the first half of 2025. At the same time, that math also says a hard landing in late 2004 or 2025 puts the S&P back to 3,500 or lower. I know that's not a comforting feeling or a great look, but as Tom Cruise says,

Starting point is 00:06:06 it's the only look I got. For investors or retiree uncomfortable with this range of possible outcomes, the Oak Harvest Investment Team has launched a new strategy that retains the ability to go long stocks, short stocks, as well as buy partial hedges for a stock portfolio. Information on this, exciting new strategy of ours can be found at oak harvestfunds.com. For the whole team here at Oak Harvest, for myself, from James, Troy, Jessica, the whole team, have a great weekend. All content contained with an Oak Harvest podcast expresses the views of the

Starting point is 00:06:38 speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any cited data, indicators, statistics, or other sources are not guaranteed. The views and opinions expressed herein may change without notice. Strategies and ideas discussed may not be right for you, and nothing in this podcast should be considered as personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities. Indexes such as the S&P 500 are not available for direct investment and your investment results may differ when compared to an index. Specific portfolio actions or strategies discussed will not apply to all client portfolios. Investing involves the risk of loss and past performance is not indicative of future results.

Stock Talk - Beyond Inflation in 2024: The Real Growth Concerns for Investors

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