Quarterly Comments February 2024

Good News vs Bad News

In this week of loving messages, we got one of those Bad News Reports which stem from basically Good News in the economy.

CPI was reported as increasing +3.9%. On it’s face this sounds OK, but forecasters and markets were expecting a number a bit lower. Housing, including rising home prices and the Owner Equivalent Rents figure, pushed CPI higher, and food prices regrettably remained higher than estimates. Despite another bellwether data point – used cars – coming down 3.4%, the stock markets saw this report as driving a stake into the heart of the potential March Fed Funds interest rate cut.

This report came on the heels of the unexpectedly high Jobs Report earlier this month of 353,000 jobs created, average hourly earnings up +4% and unemployment dropping to 3.7%. Sounds like Good News for the economy, and it is, but a strong economy is a disincentive for the Federal Reserve to get busy on a course of interest rate cuts that the markets have largely priced in. Hence, Good News is Bad News for investors.

So where is the Good News for our investments? I see several areas where we could find reason to be invested and stay there through some choppy short term activity.

  • While capital is not going to be free anymore, we are transitioning from an era of easier momentum investing to an era of skill and judgement in the management of wealth – so says Henry Ellenbogen in the Baron’s Roundtable edition last month. The stock Indexes may exhibit more volatility than is comfortable, and this evolving environment should favor a more traditional, Value style of fundamental analysis of companies that Index investing doesn’t offer.

  • Gil Luria pointed out on Bloomberg last week that the so called Magnificent 7, those mostly tech mega stocks, are producing “unfathomable” amounts of free cash flow, a key sign of healthy and growing companies.

  • The Federal Reserve committee members’ remarks mostly agree that rate cuts are coming, and we should expect a few by year’s end. They, of course, won’t say exactly when, but we believe they will begin in May or June. Why? Because the trend of inflation is down. We may not be down to the Fed’s target of 2% in 2024, but we will likely be well on our way. If this plays out as we expect, both stock and bond markets will respond in traditionally positive moves.

  • Lastly, it is the Year of the Wood Dragon. The Dragon symbol is auspicious, symbolizes power, nobility, honor, luck and success. If we are able to tap into any of these themes in 2024 we should be able to pull opportunity out of the challenge that change always brings.

We, here at Erickson,  invite you to join our next Economic Update Zoom call on April 12, 2024 at 12 Noon when you can hear about the evolving economic environment and any resulting changes to our forecast and investment outlook. Check the upcoming events page in early April for a registration link.   

The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.