A big-picture overview of the market and economy (part 2)
Today, I'm picking up where I left off in Friday's e-mail...
I'll look at how slowing wage growth is affecting consumers and the slowdown in manufacturing and services. Then, I'll conclude with my outlook for investors.
In his most recent Week in Charts, investor and finance writer Charlie Bilello shows that year-over-year wage growth was 3.86% last month – the slowest rate in three years (though a bit higher than inflation, meaning real wages are still rising somewhat):
This slowdown in wage growth has hurt the consumer, which we can see in the next two charts...
The U.S. credit-card delinquency rate rose to 3.23% in the first quarter, the highest level since 2011:
And in the New York Federal Reserve's recent Survey of Consumer Expectations, 10% of consumers say their household financial situation is "much worse off" than a year ago – more than double the percentage of those who say they're "much better off." You can see the disparity in the chart below from Charles Schwab's chief investment strategist, Liz Ann Sonders:
Turning to business indicators, Bilello shows that the ISM Purchasing Managers' Index ("PMI") is flashing warning signs of a recession for the manufacturing and services industries...
The Manufacturing PMI has been below 50 (indicating a contraction) for 19 of the past 20 months, which has only happened twice since 1948 – both during recessions:
At the same time, the Services PMI is at its lowest level in four years, also below 50. These PMIs have only been below 50 at the same time in three other instances: the Great Recession, the COVID-19 pandemic, and December 2022:
In summary, the economy remains strong, but is clearly slowing. In light of high valuation levels, does this mean it's time to sell stocks?
Not necessarily...
There are three reasons why my advice remains to stay the course if you own good stocks and/or funds.
First, I don't think we're in bubble territory for stocks or recession territory for the economy. I'm not sure that traditional indicators of a recession such as the manufacturing and services metrics above apply today because of the unprecedented economic shock of the pandemic and its aftermath.
Second, the Fed has plenty of room to cut rates, and investors now think there's an 88% chance of a cut in September. One of the main reasons I've (correctly) stayed bullish is because I believe one of two things will happen: Either the economy will remain strong, which is good for stocks, or it will slow, leading the Fed to cut rates, which is also good for stocks.
Lastly, as the Wall Street Journal's Jason Zweig notes:
Stocks are expensive – but they've been expensive, relative to their long-term average, for more than three decades. The market is extremely concentrated, but not for the first time.
As the economist John Maynard Keynes didn't say, "The market can remain irrational longer than you can remain solvent."
Relating to all this... I recently sat down on camera with my colleague Brett Eversole, where we discussed exactly what we think you should do with your money today, before the Fed's next meeting. You can watch it free of charge right here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.