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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 remains flush with cash, and the once pent-up demand continues to be unleashed, which has allowed the U.S. economy to be very resilient. The average U.S. Household is worth 35% more than pre-COVID. Consumer balance sheets are also well fortified.
Labor Market Remains VERY Resilient
There has never been a recession that did not witness a material increase in the unemployment rate, which remains “stubbornly” below 4%. And while the labor market does appear to be slowly weakening, it has thus far remained very resilient, with respectably high wage growth as well.
Inflation is Persistent, Though Peaking?
The magnitude of the policy actions used to counteract deflation may, in the end, be hugely inflationary. Higherthan-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 Policy Collateral Damage
The yield curve officially inverted in 2022, 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, as we’ve already seen in the banking sector.
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 future expectations. We believe that if earnings were to significantly drop (for reference, they tend to fall ~20% during a recession), the market could follow, as lower revenue could mean lower earnings.
Risk of a Recession
An inverted yield curve has preceded almost every recession, though it has difficulty on properly calling the timing. The yield curve is the most inverted it’s been during this cycle. If consumer spending starts to slow, the economy could witness a stagflationary environment where inflation is structural, growth is slowing, and unemployment increases. Adding to that pressure, it seems that Central Banks are content to tighten until labor markets weaken.
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Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security.
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.