My updated outlook on the economy and the market

Just like you probably do, I follow the headlines when it comes to the big picture... even though it's almost always pointless.

The vast majority of the time (at least 90%), it's impossible to fully predict macroeconomic factors like GDP growth, interest rates, or huge market moves.

That's why I don't spend a lot of time in this area. Instead, I focus on bottoms-up stock picking based on in-depth fundamental research and analysis.

That said, I follow news on the economy in part to be educated, but also to keep an eye out for calamities – big events like a major recession, housing bubble, etc., that happen only once or twice a decade.

With this in mind, I'd like to review the latest big-picture data, which Charlie Bilello helpfully provided in his March 26 and April 1 Week in Charts blog posts.

As regular readers know, I often include excerpts and charts from the blog in my daily e-mails. Bilello is one of my favorite sources for what's happening at a macroeconomic level.

And in his most recent posts, he did an excellent job capturing both the bullish and bearish arguments about the economy and the stock market.

Regarding GDP growth and unemployment, things look good...

As Bilello noted, the U.S. Federal Reserve expects GDP growth to hit 2.1% by the end of this year. That's up from the December projections for 1.4% growth in 2024.

And turning to unemployment, Bilello pointed out that the Fed has slightly lowered its expectations for unemployment for 2024: ending the year at 4.0% versus the 4.1% projection from December.

Looking at rate cuts, investors no longer expect seven cuts this year... But the Fed still guided to three cuts, which generally provide a tailwind to stocks.

The stock market was also off to its 14th-best start to a year in history and set 22 new all-time highs in the first quarter. And as Bilello showed in this chart, volatility was low in the first quarter (and well below the historical average):

Turning to areas of concern, while inflation appears tamed for now, it's still above the Fed's target of 2% – and after the burst of inflation beginning in early 2021, prices have still been 11% above the trend line. Take a look at this chart from Bilello:

However, as I've been saying for the better part of a year, I continue to believe that inflation won't be a major issue – and that I expect it will remain in the 3% to 4% range.

In his post earlier this week, Bilello also noted that the recent move in gas prices to $3.53 per gallon was the highest level since October – and $0.10 above year-ago prices.

Today, according to AAA, the national average stands at $3.57 per gallon.

Moving on, the combination of rising prices and mortgage rates has made the American dream of owning a home increasingly unaffordable for average folks. Take a look at this chart in Bilello's post from this week:

As Bilello noted, according to Redfin, American homebuyers need to earn nearly $114,000 to afford the median-priced home for sale... which is 35% more than the U.S. median household income. Here's the chart from Redfin that he shared in his post earlier this week:

Bilello put it another way:

The monthly mortgage payment needed to buy the median-priced home in the US has increased 80% over the last 4 years, moving from $1,500 per month to $2,700.

Another warning flag is rising government debt. As Bilello said last week:

Since the end of 2019, the US Treasury market has increased by over 60% to $27 trillion. Another $2.4 trillion net debt was issued in 2023 to finance the deficit.

He also included this ominous-looking chart:

And stocks, while certainly not in bubble territory, have been expensive by many historical metrics.

For example, Bilello noted this week that as of the end of the first quarter, the S&P 500 Index's price-to-earnings (P/E) ratio had risen to 24.4 times from 22.3 times at the start of the year. Going back to 1988, that's 32% higher than the historical median P/E ratio of 18.5 times.

So considering all this big-picture data...

I still think the U.S. is in good shape – certainly relative to every other major country. As Bloomberg columnist John Authers noted yesterday in this column, Markets Are Seeing a Cyclical Recovery. Forget Landing:

OK, it begins to look like we can forget about hard or soft landings, because the US economy is picking up altitude again. The numbers are coming in relentlessly strong. The latest download revealed that US job vacancies have more or less stopped declining, at a level far higher than had been seen for years before the pandemic...

Supply managers' surveys are also coming in strong. The purchasing manager indexes compiled by S&P Global show the global economy back above the level of 50 that marks the division between expansion and contraction...

This is obviously good news for the economy, for the people who work in it, and companies' chances of selling stuff.

That said, when stocks have been running hot like this, I usually take the opportunity to trim a bit and raise cash that I can deploy in the next downturn.

As such, I've been taking some profits and weeding out some losers in my personal account, bringing my cash level to 31% (excluding the value of my only real estate asset, my apartment/home). That's the highest level since before the pandemic.

But I'm still 69% invested in stocks in my personal account for two reasons...

First, for reasons I've outlined above and in many prior e-mails, I remain constructive on the markets this year.

And second, even if I weren't, it's more important to let my winners run than sell good stocks in a usually futile attempt to try to buy them back at a lower price later.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.