Our Chief Investment Officer, William Henderson, will be a speaker for The Titan Investors 2023 NYC Active Exchange Luncheon on March 2, 2023.
Bill Henderson will speak on a panel about Private Credit Investments, including investment opportunities, market implications, and opportunities in the space for investors. #TitanInvestorsExchange
Equity markets performed poorly last week in anticipation of the release of the Federal Reserve minutes. The Dow ended lower -2.61%, the S&P down -2.94%, and the NASDAQ finished the week down -3.89%. News of an approximately 16% decrease in US Real GDP QoQ (down to 2.70% from 3.20%) and a significant increase in U.S. Core PCE MoM (up 0.60% from 0.40% previously) contributed to the weak performance of the market. Additionally, consumer debt rose to a record $16.9T, and OECD is becoming slightly more optimistic about its global outlook.
Global Economy
Consumer debt reached a record $16.9 trillion (with a T), up approximately $1.3T from the year prior. Much of this debt is held in mortgage loans, roughly $11.9T worth, despite the recent decline in originations which fell to $498 billion, less than half of 4Q21’s number and a drop of $135B from 3Q22. With this increase in debt comes an increase in delinquencies, rising to 0.57% for mortgages (more than double the year prior), 2.2% for the auto loan debt, and 4% for credit card debt. The below chart from the Federal Reserve Bank of New York shows the evolution of the Total Debt Balance over the last 20 years.
Chart 1: Total Debt Balance
The OECD Secretary-General has mentioned a “slightly brighter” economic outlook for 2023 than previously thought while also acknowledging that inflation risks continue to remain elevated. The reasoning for this change in perspective is due to falling energy and food prices that are far below their peaks throughout the European Union. Additionally, the OECD made sure to highlight that China’s continual reopening is “overwhelmingly positive” for the global economy and its attempts at mitigating inflation. “Over the medium to longer term, this is very much a positive in terms of making sure that the supply chains function more efficiently and more effectively, making sure that demand in China and indeed trade more generally resumes in a more positive pattern,” he said during the World Economic Forum in Davos, Switzerland last month. The below chart from the IMF, published in January 2023, does a fantastic job of breaking down the global outlook by both Advanced and Developing economies.
Chart 2: Overview of World Economic Outlook Projections
What to Watch
Despite recent weak performance in the markets, global outlooks are beginning to become less negative. Note this does not necessarily mean a “stronger” economy. However, recession probability is on the decline (albeit slowly), and inflation is gradually but surely tempering, with interest rate increases being pushed to quicken the pace of adjustment. As mentioned, one of our more significant concerns here at VNFA is the current level of consumer debt. With inflation at its elevated level and the end of a “free money” environment, we expect consumers to pull back on their spending. Still, the opposite seems to be occurring, and delinquencies are rising. We still believe the economy is better than many others seem to believe, but we are willing to acknowledge areas of concern that may affect our outlook as we advance.
THE NUMBERS
The Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized. Interest Rates: Federal Reserve, Mortgage Bankers Association.
MARKET HEAT MAP
The health of the economy is a key driver of long-term returns in the stock market. Below, we assess the key economic conditions that we believe are of particular importance to investors.
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US ECONOMY |
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CONSUMER HEALTH |
NEUTRAL |
Real gross domestic product (GDP) increased at an annual rate of 2.9 percent in the fourth quarter of 2022 after rising by 3.2 percent in the third quarter. The increase in the fourth quarter primarily reflected increases in inventory investment and consumer spending that were partly offset by adecrease in housing investment. |
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CORPORATE EARNINGS |
NEUTRAL |
The earnings growth rate for Q3 2022 was 2.4%. For Q4 2022, earnings are expected to decline by – 4.8%, down from the previous estimate of -4.7%. This would be the first negative growth since Q3 2020 (-5.7%). So far, 94% of S&P 500 companies have reported actual results — 68% of companies beat EPS estimates and 66% beat revenue expectations. |
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EMPLOYMENT |
POSITIVE |
U.S. Nonfarm Payrolls for January 2023 increased by 517,000, almost three times the expected number of 187,000. The unemployment rate fell to 3.4% from 3.5% and is now the lowest in 50 years. Leisure and hospitality, health care, professional services, and government were among the sectors with the most notable gains. |
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INFLATION |
NEGATIVE |
The annual inflation rate in the U.S. increased by 6.4% for January 2023 compared to the December 2022 reading of 6.5%. This is the lowest CPI value since October 2021. Core CPI increased at a rate of 5.6% versus 5.7% in December. The primary contributors to the increase in inflation were shelter, food, gasoline, and natural gas. On the other hand, indexes for used vehicles, medical care, and airline fares decreased over the month. |
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FISCAL POLICY |
NEUTRAL |
A few weeks after taking control of the chamber, GOP lawmakers are pushing for austerity measures in hopes of improving the nation’s fiscal health. Democrats have responded with harsh criticism and stressed that they would not negotiate a deal with Republicans involving reductions of benefits. Meanwhile, the latest CBO projections show that rising interest rates and spending bills are adding to deficits as the U.S. is on track to add $19 trillion of new debt over the nextdecade. |
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MONETARY POLICY |
NEGATIVE |
Earlier this month, the Fed approved a 25 bps rate hike taking its target range to 4.50%-4.75%. Although the magnitude of rate hikes has been decreased, rates are likely to be kept higher through 2023 with no reductions until 2024. The FOMC has also reiterated its strong commitment to return inflation to its 2% objective. |
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GLOBAL CONSIDERATIONS |
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GEOPOLITICAL RISKS |
NEGATIVE |
While the Russian-Ukraine conflict does not show signs of abating, additional geopolitical issues have arisen in South America with the violent protests that hit the capital of Brazil. Following the October 2022 elections won by the left party, Jair Bolsonaro’s far-right supporters stormed Brasilia accusing the winning candidate and party of corruption. Bolsonaro is currently in Florida and has communicated little publicly. |
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ECONOMIC RISKS |
NEUTRAL |
Although the afore-mentioned geopolitical risks remain prevalent in everyday news, their effects on the global economy have subsided. China abandoned its zero-Covid policy, which will have a positive impact on the supply chain and the economy as a whole. The European economy also seems to be healthier than expected, partly due to an unusually warm winter that has provided some relief from increasing energy prices. |
The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.
“Wherever you go, no matter what the weather, always bring your own sunshine.” -Anthony J. D’Angelo
Tune in Wednesday, 6 PM “Your Financial Choices” on WDIY 88.1FM. Laurie will be discussing: Tax Legislation Updates.
Questions can be submitted at yourfinancialchoices.com during or in advance of the live show. Recordings of past shows are available to listen or download at both yourfinancialchoices.com and wdiy.org.