By Hightower Advisors / March 19, 2024
1.Record Inversion. The 2/10-year yield curve remains inverted after 222 consecutive trading days, breaking the streak set during the dotcom bubble in 2000, and now the longest such inversion since 1980. The pandemic shut down the economy, which government stimulus steadied in 2020 but overstayed its welcome amid 40-year-high inflation in 2021 that the Fed thought “transitory.” Then, with the Fed behind the eight-ball, historic rate hikes, which began in March 2022, took interest rates from 0.5% to 5.5% within 17 months.
All the while, “recession” headlines have pushed to apply precedence to today’s environment. An inverted 2/10-year yield curve has predicted every recession since 1955, with only one false signal. Given the extreme Covid event that put a complete stop to global economic activity, followed by supply chain disruptions, record inflation, the Russia/Ukraine war, economic turmoil in China and more obstacles to stabilizing U.S. economic activity, it is without question that we have just gone through an unprecedented period.
While the yield curve remains inverted there are factors that make this environment “different this time.” For example, the continuation of record fiscal stimulus, the Fed’s actions in running off the balance sheet and underlying economic momentum, from both the U.S. labor market holding strong with higher wages and a recovery in manufacturing with the S&P Global manufacturing new orders comfortably above 50 (a leading economic indicator). If you simply stayed on the sidelines because of the inverted yield curve, you would have missed significant opportunities.
The government deficit is likely keeping a lid on longer-term interest rates. The deficit will certainly impact future generations, and there is no good near-term resolution. Fiscal spending is requiring the Treasury to increase borrowing, while credit spreads remain historically tight with no signs of stress and M2 money supply (a measure for total cash on hand in the economy) remains $5 trillion higher than pre-pandemic.
2. Jamie Dimon Seeing an Economic Boom. This is something we have been highlighting for over a year. JP Morgan CEO, Jamie Dimon, is urging the Fed to stay patient on its inflation fight. February CPI moderated to 0.3% m/m, from a 0.4% pace in January, and remains up 3.2% y/y, while core CPI (excl. food and energy) is up +3.8% y/y. Housing prices are keeping core CPI elevated; when housing is excluded from Core CPI, February reported a sharp slowdown in pace (+0.47% m/m) compared to January (+0.85% m/m). While this is considerable progress, inflation remains above the Fed’s 2% target, and this “last-mile inflation” may be the most difficult to accomplish.
Housing inflation and wage growth are stickier than many other inflation components. Housing demand and strong employment are important for the economy, so it is not all bad news. Dimon stated that the Fed, “can always cut [rates] quickly and dramatically. Their credibility is a little bit at stake here. I would even wait past June and let it all sort it out.” We do not expect the Fed to change its target rate during this week’s FOMC meeting.
3. U.S. Banks Are Seeing an Increase in Loan Demand. Loan growth over the last eight weeks is up 6.2% y/y vs. 2% in 2023. In addition, one Fed survey showed a smaller proportion of banks tightening lending standards in the fourth quarter, compared to the prior quarter. We are likely past peak commercial tightening for banks. While lending standards are elevated, commercial loan growth can support economic activity. According to the survey, consumer lending continues to tighten.
In March, value sectors have outperformed growth. This is a shift from January-February when growth sectors outperformed. We are paying attention to technical indicators that highlight shifting momentum that supports value-based sectors, like energy, financials, industrials and materials, amid potentially overbought scenarios for growth sectors, like technology and consumer discretionary. Small caps continue to underperform large caps in 2024 with the Russell 2000 recording its worst week last week since the opening of 2024.
4. Record Dividend Payments. Global corporate dividends paid out $1.66 trillion in 2023.3 Worldwide, 86% of listed companies either increased or maintained dividends last year. Strong cash flows drove companies to increase shareholder returns broadly in the form of both dividends and repurchases. The banking sector represented half the growth in dividends last year. We expect a similar dividend growth trend again this year as revenues and margins remain supportive across sectors like energy, healthcare and consumer goods.
5. Fixed Income. U.S. Treasuries tumbled throughout the week, following stronger-than-expected February CPI and PPI reports. The U.S. 2-, 10- and 30-year Treasury yields rose by 22, 23 and 19 bps, respectively. Fed Chairman Powell and the voting committee are expected to keep the fed funds rate at current levels during Wednesday’s FOMC meeting as aforementioned inflation reports and job markets remain strong.
High yield spreads remain tight, reaching a new 52-week low last Friday, at +350 bps. The muni yield curve rose 3-4 bps on the short end and fell 1-3 bps on the long end. Munis are still lagging as Treasuries move higher and put further pressure on already rich muni ratios.
6. The Week Ahead.
Earnings – Wednesday: GIS, MU; Thursday: DRI, NKE, FDX.
Economics – Monday: NAHM Housing Index (March); Tuesday: Housing Starts and Building Permits (February); Wednesday: March FOMC Meeting; Thursday: Philadelphia Fed Index (March), PMI Composite (March).
Sources
Disclosure
Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, as a member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.
Hightower Advisors is registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.
This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.
All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.
This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of Hightower Advisors, LLC, or any of its affiliates.