July 2024
Issue #3
Less disposable income leads to slowing growth.
THE BIG 3
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Stagflation
Inflation is still hanging above long-term averages, while growth slows.
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China
What is going on with Chinese banks?
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Election Prediction
November is coming into focus.
Stagflation
Inflation remains high while growth slows.
Recent data has shown a modest slowing, in rate of change terms, in both growth and inflation. Things get a bit more interesting when you look at the previous year’s values.
At this point, it is nearly impossible for growth to improve from current levels. An additional $275 B in NEW growth is required to increase GDP by 0.01%. With inflation remaining high and total unemployment creeping up on 4.2% (+.7% YOY), we do not see a way the US consumer can drive additional growth over the short term. We have also noted a significant increase in residential real estate sale prices across nearly all major metropolitan areas. This should prove helpful for new home buyers, but it will create a reduction in net worth for existing homeowners. Historically, this perceived loss of wealth leads to less discretionary spending.
China
Chinese real estate has been one of the most ridiculous asset classes on planet earth for more than a decade. It would seem that the piper is finally getting paid. So far this year, more than 40 Chinese banks have essentially disappeared. Since China’s economy is tightly controlled by the CCP, transparency on what really happened is not a priority. What we do know is that these banks primarily dealt in sketchy real estate lending. In some instances, nearly half of their total loans were in default. There is good news though. China seems compelled to clean up their banking system and keep it in house. This should minimize contagion across borders.
Election Prediction
There is certainly a lot of sympathy built into the latest betting odds chart to the left. No meaningful data is available on market reactions to political assassination attempts, but judging from the recent performance, it is fair to say the stock market is firmly pricing in a Trump victory. With President Biden dropping out of the race, historic precedence is equally as scarce. Looking back at LBJ’s withdrawal in the spring of 1968, the market rallied 15% over the remainder of the year. It is important to note that US stocks had been in a bear market leading up to the announcement. Given these recent events, we predict a slim margin for Republicans in both houses; however, a split congress is nearly as likely. If that is the case, US stocks have a tendency to perform well during periods of political stalemate (ie 2023 & 2024).
The Bottom Line
The US stock market has remained optimistic through various economic conditions for more than 18 months. This optimism will eventually fade.
As the market is pulling forward a predicted Trump victory, do not be surprised if volatility makes a resurgence leading up to the election. I encourage you to read our last two quarterly blogs for more information on what to expect. Until next time, remember hope is not an investment strategy!
Any opinions are those of Alexander Leonida. The information contained in this document does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but CFG does not guarantee that the foregoing material is accurate or complete. This newsletter: (a) is not an official transaction confirmation or account statement; (b) is not an offer, solicitation, or recommendation to transact in any security; and (c) may not be retransmitted to, or used by, any other party. Investment products are: Not deposits. Not FDIC or NCUA insured. Not guaranteed by the financial institution. Subject to risk. May lose value.
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