My macro outlook
Continuing my series on my presentation on Tuesday at the annual Stansberry Conference & Alliance Meeting in Las Vegas...
In yesterday's e-mail, I concluded that:
By almost every measure, valuations are high – especially among tech and large-cap stocks.
It's true that there are pockets of foolishness in the market right now (the latest example: Beyond Meat (BYND) spiking more than 600% in the past week).
However, I don't think we're in bubble territory – especially in light of how resilient the U.S. economy has been.
Today, I'll share the highlights from the portion of my presentation reviewing how our economy is doing – along with my macro outlook.
GDP growth has been strong (this chart and many of the ones below that I shared are from the recent State of the Markets blog post from Creative Planning's Charlie Bilello):
And the Federal Reserve Bank of Atlanta estimates that third-quarter GDP growth will be a robust 3.9%:
S&P 500 Index earnings per share ("EPS") have been exceptionally strong:
Inflation took off in 2021, peaked at 9.1% in mid-2022, and has fallen sharply since then:
To rein in inflation, the Federal Reserve raised interest rates at an unprecedentedly rapid pace:
When I recapped my macro summary from my 2024 presentation at the same conference, I wrote:
The Fed just started lowering rates with a 0.50% cut last month, and the market expects two 0.25% cuts this year and four more next year. I think the economy will remain strong, so I expect there will only be two cuts next year...
My rate expectations were correct – as the current federal-funds rate is 4.11%.
Here's the chart I shared in last year's presentation (with my expectations shown in the red line I added), but now with the current rate highlighted:
I have a similar forecast today...
The market expects two 0.25% cuts this year and two to four more next year. But I think the economy will remain strong, so I expect only one cut next year.
As such, here's a chart from Tuesday’s presentation showing the market's expectations and mine:
The unemployment rate is 4.3%. That's up slightly from the generational low it reached two and a half years ago, but still at a historically low level:
Wage growth has outpaced inflation – meaning real wages have risen – for 28 consecutive months:
But job growth is clearly slowing:
My conclusion from all of this is that the economy, though slowing, remains strong.
The expansion is now 62 months long. (Keep in mind that the past four expansions lasted a minimum of 73 months. And the expansion from 2009 to 2020 ran for a record 128 months – that's more than 10 years.)
Inflation is muted and likely to remain so.
So I see two win-wins for investors:
- Either the economy will remain strong (good for stocks)... or it will weaken, and the Fed will cut more aggressively (also good for stocks).
- Investors can sit in stocks (and likely earn decent returns) or cash (and earn risk-free returns of nearly 4%). (Just make sure you're earning market rates on your cash!)
In fact, while I'm not predicting it, I think there's a greater chance of a market melt up than meltdown.
That's because long bull markets often don't go straight into a crash. Instead, they have a blow-off top – a true bubble – and then the crash happens.
In my presentation, I shared charts of three examples of this...
The "Roaring '20s":
The Japanese stock market in the 1980s:
And the tech-heavy Nasdaq Composite Index in 1999 and early 2000:
I've said it many times here in my daily e-mails...
If you own high-quality stocks or index/mutual funds, stay the course – but just have modest expectations.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.