Category: IHT Articles

 

By:  Colin Cheaney, CFA

Tariffs and the U.S. trade deficit have dominated headlines lately, with both equity and fixed income markets recalibrating based on future growth prospects. And what’s incredible is that market pundits finally agree on one thing for once – tariffs aren’t great for the global economy. For decades, free trade has benefited U.S. consumers and helped lower income countries grow, while allowing the U.S. to focus on investing in high value services and advanced manufacturing.

One important, yet often overlooked, aspect of the trade debate is services. While the United States has a trade deficit on the goods side of the equation, when we focus just on services, we actually run a trade surplus. Keep in mind when we hear the trade deficits referenced by the Trump administration, those generally focus solely on goods. Just because we run a goods deficit with a country, doesn’t necessarily mean we’re getting ripped off. There are two sides to every coin.

Currently, the U.S. workforce revolves around services. Almost 80% of our workforce is employed in the services sector, while the remaining 20% consist of workers in goods-producing industries. Breaking it down even further, less than 10% of Americans work in manufacturing – a massive decline since peaking in the 70s. By prioritizing services-based industries over the years like consulting, banking, logistics, insurance, and travel, we‘ve created new high paying, highly sought after jobs that help keep the U.S. economy churning.

Because most services are delivered digitally or virtually, retaliatory tariffs don’t apply directly and might not hit as hard initially, but the downstream effects resulting from lower confidence from our trading partners aren’t desirable. To target our services exports, foreign countries could tighten licensing requirements and impose bureaucratic hurdles that make it harder for U.S. firms to conduct business overseas.

Nobody knows exactly what the impact of tariffs will be, and the market uncertainty out there is real, but investors can take a little comfort in the fact that the U.S. economy doesn’t rely solely on producing goods – don’t forget about services.

By:  Colin Cheaney, CFA

The University of Michigan’s Consumer Sentiment Index (MCSI) is set to be released this Friday, with the preliminary reading having shown about a 10% decline from February. While this index has been known to be a harbinger for consumer spending in the months ahead, investors would be better off to block out the noisy headlines around declining sentiment as of late.

The MCSI is essentially a tool to get an average feel for how Americans view their current financial situation. With over 500 households surveyed each month, the questions asked revolve around if respondents think they’re better or worse off financially compared to a year ago, what they think will happen to interest rates, and if they think prices will go up or down in the year ahead.

Because consumer spending does account for over 65% of GDP in the U.S., it’s helpful to gauge the financial health of Americans, but keep in mind the index is just a formal way of consolidating opinions and our less-than-admirable forecasting skills. Things like political affiliations, media exposure, employment status, and personal debt levels all have an influence on sentiment – and they’re all unique to every one of us.

The index is an opinion, not a fact. While steps are taken to make sure the participants are representative of the U.S. population, everybody’s financial situation is different, so investors shouldn’t try to time the market based on the opinions of only 500 survey respondents.

Feelings on Main Street aren’t always the same on Wall Street. Think about what really matters for future performance of mega cap names like META and AMZN – earnings and cash flows. People might not be too happy about their current financial situation, but that won’t mean they stop scrolling Instagram or cancel their Amazon Prime subscription.

The chart above shows how over the past 10 years the Consumer Sentiment index has actually trended downward, reflecting increased pessimism, while we’ve seen the S&P 500 continue to reach all-time highs. Bottom line – the index is helpful to get a general vibe for how Americans are feeling, but the stock market just doesn’t care.

By:  Colin Cheaney, CFA

With the release of January’s CPI figures on Wednesday, inflation has proved stickier than expected. But which inflation gauge is actually worth paying attention to? The US Consumer Price Index (CPI) and Personal Consumption Expenditure Index (PCE) both have an underlying basket of goods and services used to calculate their indexes, but the main difference lies in how those items are weighted.

There’s a reason the Fed prefers the PCE index – it’s backed by hard data. When calculating the weights assigned to each good and service in the index, actual spending data gathered by the Bureau of Economic Analysis (BEA) is used, rather than annual survey data used in calculating the CPI, to determine what percentage of people’s paychecks gets spent across healthcare, groceries, gas, capital goods, etc.

Generally speaking, core PCE will run cooler than core CPI. The core figures exclude volatile food and energy prices and give a better feel for actual price increases across the economy. PCE recognizes that people substitute cheaper goods when prices rise and will update its underlying basket monthly, while CPI’s basket of goods and services is relatively constant with weights updated on an annual basis.

It’s important to note that just because PCE is less than CPI, doesn’t mean inflation should be downplayed. Nobody likes making substitutions when spending, so inflation will still hurt when CPI is high, even if it’s PCE that represents the real ability for people to get by.

While the headlines are talking about CPI, keep in mind that the Fed’s decision on interest rates, which affects everything from your credit card rates to mortgage rates, will depend more on the PCE print scheduled to be released on February 28th.

 

Taking a look at the May 2023 market outlook, IHT Wealth Management examines the recent banking challenges, labor market, and areas of opportunity for investors.

May 2023 Market Outlook for Banking Sector

As many saw in the headlines, the banking sector faced massive issues over the last few months. However, the big banks with the highest risk and worst operational execution have already been dealt with. Particularly, First Republic and Silicon Valley Bank both had unique circumstances that do not reflect the broader health of the banking system. Furthermore, while First Republic did not get closed until weeks later, it suffered the majority of its damage in the first few days of the banking crisis.

On the other hand, most of the other regional banks reported much smaller deposit declines and fewer liquidity issues. Generally speaking their deposit bases are have more insured depositors and face fewer concentration risks. Down the road, some of these regional banks may face issues generating high earnings, but the immediate liquidity issues are behind us.

May 2023 Market Outlook for Labor Market

The broader market faces recession risks as rate hikes and a pull-back in bank lending impact the American Consumer. At this point, a recession is nearly certain. The question is less whether “if” it occurs and more so pertaining to its magnitude. Will this trigger a hard landing or a soft landing?

Right now the job market is exceptionally strong, paving the way for a soft landing. However, if the banks start to be too restrictive in issuing new credit and the labor market starts to crack then the risks of a more severe recession elevate. The debt ceiling is also a concern. Historically the politicians have always come to an agreement, even if it comes at the eleventh hour – but the deliberating and time wasting does not inspire confidence for the markets.

Safety Bid for Tech and Stance on Energy

Technology is becoming a safe haven. Sector cash flows are exceptionally strong and most companies carry little debt, limiting the impact of interest rates. Furthermore, most of the tech sector has ample room for margin improvements.

Emerging markets look interesting – they are ahead of the United States in the battle against inflation. In fact, many South American countries are now pivoting towards rate cuts rather than rate hikes. China reopening after Covid is also significant.

Finally, energy is another space we are monitoring. While it is exceptionally volatile, companies in the space have become much more disciplined allocators of capital and have generally become much more shareholder friendly.

Watch the full interview on YouTube.

To reevaluate your inflation strategy in 2023, contact the financial advisors at IHT Wealth Management.

When discussing 2023 inflation trends, we first take a look back at the Federal Reserve’s recent moves regarding interest rates. Last month, the Federal Reserve raised rates by 25 basis points. This stepped down from 50 basis points in December. However, the latest strong batch of economic reports suggest that 50 basis points returned to the table.

Examining the Future Beyond 2023 Inflation Trends

Regardless of whether the Federal Reserve raises rates by 25 or basis points, investors need to ask themselves about where the United States economy will head over the course of the next 6-12 months. Furthermore, what does the terminal rate look like for interest rates? Will it be 4.75%, 5.0%, or 5.25? Currently, any of these numbers is in play. Additionally, most fixed-income investors should feel capable of handling these rate increases.

However, in the event that the Federal Reserve feels the need to increase the federal funds rate beyond 5.25%, this causes greater challenges for investors and the United States economy as a whole. Rates at 6.0% and 6.25% create more cause for concern.

Understanding the Federal Reserve’s Inflation Strategy

This past week, the Produce Price Index, inflation figures, and consumer spending figures came in stronger than anticipated. For instance, the Producer Price Index rose 0.7% month-over-month in January. This exceeded the 0.4% increase consensus forecast. Ultimately, this data does facilitate concerns over the “stickiness” of inflation.

Overall, the Federal Reserve’s hands are somewhat tied. Not only are they combatting inflation, they are dealing with expectations of future inflation as well. Food prices, fuel prices, and other volatile market sectors contribute to higher inflation expectations. In another example, housing prices facilitate further inflation. Since the Great Recession, the United States dealt with a shelter shortage. To make matters worse, raising interest rates further increases prices related to home construction, skilled labor, and material costs.

Best Practices for Dealing with 2023 Inflation Trends

Despite these challenges, inflation will eventually come down. At present, the economy is facing a lag effect from the Federal Reserve’s periodic rate increases. Even by the end of 2023, it is unlikely that the Federal Reserve will begin to cut interest rates due to this lag effect. Crucially, the Federal Reserve wants to “beat” inflation the first time around, as opposed to pausing or scaling back interest rate hikes only to redo them later down the road.

In the meantime, the bond market should see plenty of activity, making banking stocks and investing vehicles attractive. Simply put, they do not face the same wage pressure that other sectors, like restaurants and bars might. As for the ongoing concerns regarding the tech sector, this market segment proved time and time again to find new ways to drive margins, even in tough times.

Watch the full interview on YouTube.

To reevaluate your inflation strategy in 2023, contact the financial advisors at IHT Wealth Management.

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IHT article in Forbes: get the full article here

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