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Five for Friday - April 19, 2024

Five for Friday - April 19, 2024

Running Hot, Homebuilding, Geopolitics, Taxes, and Stocks for Inflation

1. Economy

The stock market is down in recent weeks as economic data across the board has come in hotter than expected, prompting another round of reevaluation for just how many interest rate cuts the Federal Reserve can execute in 2024. Inflation jumped in March on the back of higher insurance and energy prices, and has been stuck in the 3-4% range for ten straight months (the Fed targets 2%). That’s the bad news. But March also saw retail sales (i.e. consumer spending) reaccelerate and the U.S. add an expectation-crushing 303,000 jobs. The question for years has been “soft landing” or “hard landing” in the economy, but the data is increasingly looking like “no landing.” The Fed may not find room to cuts rates in 2024 at all, and that will require an adjustment period for the market – i.e., consolidation and elevated volatility – but if it’s primarily because the economy is too strong to do so, then it’s hard for me to get too bearish on stocks.

2. Housing

The “last mile” in inflation – i.e., getting from 3-4% down to the Fed’s 2% target – is mainly about housing. The cost of shelter is consumers’ biggest expense and a combination of strong demand and structural undersupply has pushed prices ever-higher. Inflation (ex-shelter) has averaged 1.8% over the last 12 months. But we find ourselves in a tricky spot. Sticky inflation – driven in large part by housing/rents – is keeping interest rates higher for longer. And yet it is those same higher interest rates that are restricting homebuilding activity. While homebuilder sentiment actually held steady in March, housing starts fell 15%, with multifamily starts at their lowest level since April 2020. Higher rates also keep those with sub-5% mortgages locked into place. So, what breaks the doom loop? Perhaps fiscal policy. Our partners at Strategas have been spot on in noting that re-election years are strong for markets because incumbents tend to grease the economic wheels – alleviating some regulatory hurdles for builders may be an option. It would certainly be popular, at a minimum.

3. Tensions

Forecasting is difficult in any arena, but forecasting geopolitics is an entirely different beast. Uncertainty is high, action-reaction relationships are complex, and information clarity is muddy at best. Further, history shows a wide range of outcomes for stocks following high profile geopolitical events, making any attempt to time the market even more difficult than usual. But importantly, any initial weakness often tends to fade: looking at 30 major geopolitical events in the last 85 years, we see mixed performance over the following 1- and 3-month periods, but a double digit median return one year out. A big conflict, especially one that could drive oil higher, broadens the range of outcomes for the global economy over the near-term, but history shows that staying the course – whether through financial crises, pandemics, or geopolitical conflicts – has long been a key marker of investor success.

4. Taxes

Per Strategas, Tax Day 2024 was the largest day of non-withheld and corporate income tax revenues on record. This certainly helps with the budget deficit, but revenues are still running below CBO forecasts and, further, higher payments reduce consumer savings at a time when budgets are already tight.

5. Stocks

One of the ironies of the recent inflation cycle is that any fear-driven selling of stocks actually caused investors to shed the investment best primed to outperform during a period of rising prices. Sure enough, the S&P 500 has out-performed Gold (barely), Commodities, Bonds, and Cash over the three years since it became clear inflation was ramping in a troublesome way (the April 2021 inflation print, then the highest since 2008). As esteemed economist and author Jeremy Siegel notes, “Fear has a greater grasp on human action than does the impressive weight of historical evidence.”


This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.

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