I’m going to cover three areas: the current state of the economy and markets, a review of each candidate’s economic proposals, and finally…where we go from here.
Let’s jump in.
Current State of the Economy and Markets
Economy:
The overall economy is okay but showing signs of weakness.
· GDP growth continues to be strong, with little weakness since the recovery in 2020. The US GDP grew by 3% in Q2 of 2024, a healthy number for an economy our size.
· Unemployment is running at 4.1%. While this rate is low, historically, unemployment has trended upwards since hitting 3.4% in April 2023.
· Inflation has plateaued but that doesn’t mean prices are dropping. Inflation was 2.4% in September, the lowest year over year increase since 2021.
Those are the numbers in the headlines, but I want to share a couple data points that I think frame the situation better.
· Unemployment doesn’t show the full picture. I also like to look at the Quits data. This shows how many people leave their jobs in a given period. Intuitively, people are more likely to quit their jobs when the economy is good and they believe they can find another position quickly. Likewise, the number drops when confidence in the economy drops.As you can see in the graph below, we hit a peak in quits early in 2022. At that time, prices were rising, and companies were increasing wages to attract workers. Since then, the number of people leaving their jobs has dropped significantly. I see this as a leading indicator of weakness in hiring.
· While the inflation rate is dropping, prices have still increased faster than wages. Food costs are the most painful, with an average increase of nearly 30% over the last four years. Even if inflation dropped to 0%, it would take time for wage increases to offset the overall spending increase.
This chart shows the compounding nature of inflation. While inflation began slowing in July 2022, that just means that prices aren’t going up quite as fast. The red line represents food prices. You can see how it has continued to rise.
· Increased spending and flat incomes lead to more credit card debt. This is best shown in the chart below. The blue line represents spending, and the green line shows disposable income. As you can see, spending goes up while income stays the same, after an initial bump in 2021.When spending increases and wages are flat, the difference must come from somewhere. In this case, the growth of credit card debt tracks the growth in spending almost perfectly. The red line shows growth in consumer debt like credit cards and other revolving debt.
· Credit card delinquency rates are increasing. Like the Quits rate, I look to credit card delinquency data as a leading indicator of weakness in the economy. Those on the economic fringe, living on credit cards and debt, are often the first to feel the squeeze when the economy begins to turn down. The absolute percentage increase is less important than the direction and the magnitude of the increase. Directionally, the delinquency rate has more than doubled since the end of 2021.
The reason I look at these data points is simple. The American consumer drives the American economy, as consumer spending makes up 68.7% of the US GDP. If the American consumer slows spending, the rest of the economy will feel the effect.
Stock Market:
Frankly, this one is short and sweet, with one caveat.
The markets have had a great year so far.
The S&P 500, a broad market index, is up 22.52% this year as of the time I’m writing this. The Nasdaq is up 25.54% and the Dow Jones Industrial Average is up 11.68%. Gold has had a great year, up more than 32%, and Treasuries are up too.
The only caveat is that by most measures, the stock market is getting expensive, based on current earnings. Price to Earnings, a measure of how expensive or cheap a stock is, have increased over the last few years.
My takeaway is that it’s never a bad idea to take some gains off the table and protect a bit more.
The Election:
The race appears to be neck and neck, based on most polling. The most recent polls I’ve seen showed a tied race between both candidates.
I pay attention to the polls, particularly Nate Silver at 538, but polls can be inaccurate. We saw that in 2016. I also look at various betting markets to get a sense of the momentum of each candidate. Currently, the betting markets are favoring Donald Trump by a fair margin.
One important thing to note is that most polls don’t factor in the effects of the Electoral College. What I mean is that since we live in a Republic, the actual popular vote for President means very little…Hillary Clinton and Al Gore both won the popular vote.
My biggest takeaway on the election’s impact on the market is this: no matter who becomes president in January, the President has little direct impact on the stock market. If we have a contested election, for whatever reason, the markets will likely react, but that’s unlikely to be a long-term issue. Long-term, the market is based on the growth of the US economy and I have confidence in that.
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