Robust consumer spending, driven by real personal income gains and sustained private and public investment, indicates a positive trajectory for economic growth. Forecasts from most economists predict steady growth near the long-run rate of roughly 2% for the United States in 2024, supported by policy tailwinds from fiscal and monetary authorities.
However, contrasting perspectives highlight potential risks and challenges. Higher interest rates, geopolitical tensions, and the ongoing conflict in the Middle East cast shadows on the outlook for the upcoming year. Concerns about China’s debt and deleveraging cycle also contribute to a sense of uncertainty, as they could negatively impact global economic demand.
Overall, the economic situation in 2024 remains complex and uncertain. Conflicting data and varying predictions make it challenging to determine a clear direction for the economy. While some signs point toward continued expansion, underlying risks and potential headwinds raise concerns about a potential slowdown or recession.
One source of concern for financial markets is the fact that transportation stocks have underperformed in 2024. Through yesterday, the Dow Jones Transportation Index is down 7% while the S&P 500 is up more than 10%. Historically, this is a bad omen for future stock returns because a strong economy has generally been correlated with rising shipments of goods. These weak results among transport stocks may be due to companies requiring less shipments due to excess inventories being worked off. Another reason may be that our economy is increasingly supported by growth in services and software that isn’t shipped on trucks, trains, and airplanes.
Nonetheless, fears of an economic slowdown, coupled with increased fuel costs and labor shortages, have eroded profitability and investor confidence in transportation stocks such as FedEx, UPS, and railroad operators such as Union Pacific and CSX. Higher interest rates have also added pressure. Despite these challenges, the broader stock market has thrived, driven by robust growth in the technology sector and optimism about an economic recovery.
The recent parabolic rise in the value of companies such as NVIDIA and other AI-centric stocks has offset the declines in transportation stocks, and other decliners. In fact, NVIDIA’s market capitalization of approximately $2.8 billion is now the third largest valuation among S&P 500 constituents. Since reporting results last week, NVIDIA’s stock has risen more than 20% while the broader S&P 500 index has declined over the same period. Divergences like this are uncommon and possibly a warning sign.
Inflation in 2024 continues to disproportionately burden lower-income consumers. Rising prices for essentials like food, housing, and energy significantly strain their budgets, reducing purchasing power and increasing financial stress. Limited flexibility and lack of savings make it difficult for them to cope with these rising costs, often forcing them to choose between essential needs. Inflation further erodes their limited savings and investments, hindering their ability to build wealth and secure a stable financial future.
We are hearing an increasingly harmonized chorus of statements from CEOs that low-income consumers are finding it difficult to manage their finances. Below are just a few examples:
• Pepsi CEO: “The lower-income consumer … is strategizing a lot to make their budgets get to the end of the month.”
• President of McDonald’s USA: “Americans across the country are making tough calls about where to spend their hard-earned money.”
• Target CEO: “[Shoppers are continuing to] look for ways they can stretch their budgets.”
These trends put the Fed’s rate decision-making committee in a difficult position. Low-income consumers haven’t benefitted from the inflation in asset prices to the extent that it has helped the more fortunate segments of our society. Balancing economic growth and inflation going forward certainly presents challenges.
The S&P 500 trades for 21x forecasted 2024 earnings which we regularly note as elevated relative to history. The 10-year US Treasury yield is 4.6%, up from 3.9% at the beginning of the year. The underperformance of transport stocks may be telling us that the economy has softened. And, given the mixed signals from inflation readings year to date, it is unlikely the Fed will make any significant cuts to interest rates anytime soon.
Thus, the caution flag is out as we await more clarity on the corporate earnings front. We may be in for a bit of volatility, but that doesn’t mean we can’t enjoy the start of summer.
Singer Wynonna Judd turns 60 today, and singer and actress Idina Menzel is 53.
Christopher Gildea 610-260-2235