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This is our biggie each quarter, pages of charts and the context to go with them. As always, we think the windshield view is far more relevant than the rearview. But it’s through the rearview that we get a sense of the path traveled to this point, helping to set the course ahead. Executive summary here:
The U.S. Consumer Continues to be Resilient
We believe the aggregate consumer is flush with cash, and once pent-up demand can safely be unleashed, the U.S. economy can continue being resilient. The average U.S. Household are worth ~30% more. Consumer balance sheets are well fortified and flush with cash.
Inflation is Persistent, Though Peaking?
The magnitude of the policy actions used to counteract deflation may, in the end, be hugely inflationary. Higher-than-expected inflation tends to be a major headwind to equity valuations, but it appears that inflation has peaked for now. For markets, how the Fed chooses to address inflation is as important as the inflation itself. The battle isn’t over, as services and wage inflation continue to be “sticky”.
Fed Collateral Damage
The yield curve officially inverted in ’22 creating speculation of a recession. This means caution in communication by the Fed to avoid the mistakes of the Yellen Fed and the “stop-and-go” policy from the ’70s. The Fed’s number one goal is to anchor inflation, even if it puts the economy into a recession. With this, there may be some collateral damage in parts of the speculative market.
Inflation Transitioning to Growth Frustration
Earnings Expectations for the S&P 500 have only come down 9.1% in ‘23. Anecdotally, margins continue to compress at the corporate level, but have not yet been represented in overall analyst’s earnings expectations. We believe that if earnings were to significantly drop, which they tend to fall ~20% during a recession, the market could follow, as lower inflation could mean lower earnings.
In the last major debt crisis, the market learned that the process is just as important as the outcome. Yet, during this time period, stocks fell 20% amid political uncertainty. This go-around, the government’s budget will be jawboning with increased interest rates that will drive interest expenses higher, as 50% of the U.S. debt comes due in the next three years that are currently financed at much lower rates.
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The opinions expressed are those of the Aptus Capital Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.
The S&P 500® Index is the Standard & Poor’s Composite Index and is widely regarded as a single gauge of large cap U.S. equities. It is market cap weighted and includes 500 leading companies, capturing approximately 80% coverage of available market capitalization.