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Five for Friday - April 12, 2024

Five for Friday - April 12, 2024

Jobs, Consumer Debt, Quality Stocks, Behavioral Finance, and Coffee

1. Jobs

The U.S. added 303,000 jobs in March, a big upside surprise versus expectations. The unemployment rate dropped for the first time this year and the labor force participation rate unexpectedly rose. This is unabashedly good news. And yet, in a world of inflation, good news on the economic front can be viewed as bad news on the market front – with the idea that if a strong economy and labor market push wages up (and, therefore, inflation up), it will cause the Fed to keep interest rates higher for longer. Interestingly, average annual earnings growth for production and nonsupervisory workers actually dipped to 4.2% in March – their lowest since July 2021 (while job site Indeed recently noted that posted wage growth in the U.S. fell to 3.1% in March, matching its pre-Covid level). This economic strength will likely reaffirm some hawkishness at the Fed (our partners at Strategas now assign 50% odds to a June rate cut, which was considered a near certainty earlier this year), but all said, economic strength is economic strength, and we won't quibble at the idea of more people working. In a consumer economy, employment drives growth, and 2024 has seen a reacceleration on that front.

2. Debt

The recent uptick in auto and credit card loans flowing into delinquency is something worth watching over the coming months, especially given how critical consumer spending has been to economic growth. But for a discussion about any debt (consumer, government, etc.), context is critical – namely, what are the assets or income of the borrower, and how does that ratio compare to past eras? J.P. Morgan took a look at consumer finances in their Guide to the Markets, and the standout chart is the look at the consumer balance sheet on page 20: $177 trillion in assets (!) to just $21 trillion in liabilities, with aggregate debt-to-income ratios still hovering near multi-decade (ex-Covid) lows. The reconstruction of consumer balance sheets after the 2008 Crisis was a painful process, but it will bear fruit during the next downturn.

3. Quality

While the earlier stages of a bull market are more often defined by speculative and lower quality stocks outperforming, the first quarter rally actually saw high quality stocks – those with better returns on equity, free cash flow growth, etc. – deliver the most alpha (the MSCI Quality Index rose 11.6% to the S&P 500’s 10.6%). Perhaps the promise of a higher-for-longer interest rate regime paired with some uncertainty around the country’s fiscal situation is pushing investors to seek quality over speculation, even in a bull market. Whatever the reason, it does represent a modicum of caution versus the typical animal spirits that take hold off major market lows. I wouldn’t quite argue that sentiment is in the market’s favor right now, but there are enough small signs of trepidation that a genuine market top seems unlikely for now.

Chart: The MSCI USA High Quality Index is outperforming both the S&P and Russell 2000 since major market low six months ago.

4. Behavior

A belated note recognizing the passing of the legendary psychologist Daniel Kahneman, whose work (in conjunction with his partner Amos Tversky) laid the foundation for the entire fields of behavioral economics and finance. I would highly recommend his book “Thinking Fast, and Slow,” as well as Michael Lewis’ accounting of the working relationship he shared with Tversky (The Undoing Project). Both are chock full of valuable lessons, but one of my favorite things I’ve read in the aftermath of his passing actually came from his long-time collaborator Jason Zweig, writing on how to use Kahneman’s work to become a better investor and person: “You must also try to predict, minimize and learn from your mistakes. Blindness to our own blunders is the biggest single obstacle to investing success.”

5. Saving

I often cringe at investing advice that paints the younger generation as opulent spenders with no ability to save (“give up the $45 avocado toast, millennial!”). But occasionally, a reminder of the power of compounding and investing early is due. Take the example I presented to a room of college students earlier this spring: If you were to reduce your coffee consumption by a single cup a week ($3.13 at Starbucks), save that money for just the four years of undergrad, and invest assuming the average S&P 500 return over the last 75 years holds, you would actually end up with over $100,000 extra dollars at retirement age. One coffee per week, four years, $100,000. Thinking that long-term can be challenging in an increasingly short-term world, but the rewards of compounding and wealth creation are there for the taking if we want them.


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