A Warming Economy

Telemus Weekly Market Review February 5th, 2024 - February 9th, 2024

Over the past week, January economic data has trickled in and unquestionably shown that U.S. economic activity remains robust. The data released thus far in February has demonstrated unemployment remains anemic, the number of jobs continue to grow, consumer spending remains resilient, and industrial activity indicates signs of improvement. The current economic strength has pushed the S&P 500 up nearly 4% thus far in February, 1.4% of which came this past week. 

These unexpected positives have led to an inflection in the Citi Economic Surprise index, which had been decelerating since October. According to the Federal Reserve Bank of Atlanta, the U.S. economy appears to be on track to grow at a 3.4% annualized rate in the first quarter. This is well ahead of many economic forecasters that presently expect the economy to expand by 2.3%. 

Our view is that the economy is no doubt overshooting expectations at present. There is a higher probability that the Fed may have engineered a ‘no landing’ scenario where they have squashed inflation without causing an economic slowdown. While that’s how it looks today, one has to be forward looking and acknowledge there remain risks that could shift the economy into a lower gear. These risks include geopolitical tensions, an elevated U.S. fiscal deficit that requires a sizable uptick in Treasury issuance, and consumer spending that is being fueled by a lack of savings and rising debt levels.  

These are just risk considerations, and they may ultimately resolve themselves without impairing the economy. Current economic momentum supports owning riskier asset classes such as equities. Moreover, earnings results for the fourth quarter indicate business momentum in many of the Magnificent 7 stocks (Apple, Amazon, Alphabet, Microsoft, Meta, Tesla and NVIDIA) remains strong.  These assets appear to be priced as if the current economic trajectory will continue uninterrupted. While this may indeed occur, they could also have greater downside potential if some of the underlying risks begin to unfold. 

Balancing what’s working today while recognizing valuations price in uninterrupted economic momentum leads to a challenging investment environment. As such, we don’t think it’s prudent to solely follow the narrow trade that favors large growth-oriented technology stocks. At times where markets price in a narrow set of outcomes, diversification matters as a means for controlling risk. In the short-term that may mean owning some assets that aren’t presently in favor and sacrificing a little bit of return. However, doing so helps to provide portfolios with some protection against a downside scenario. 

We are encouraged by the economic progress thus far in 2024. We remain optimistic that the United States economy will avert a slowdown. However, as with all economic environments there will be ups and downs. In our view, having broad diversification and regularly rebalancing is a prudent means of navigating where market trends are today, while maintaining balance should economic momentum begin to shift. 

All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Telemus Capital cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. Kovitz Investment Group Partners, LLC (“Kovitz”) DBA Telemus Capital. Telemus Capital is a division of Kovitz, a registered investment adviser with the Securities and Exchange Commission (SEC). Telemus Capital’s main office is located in Southfield, Michigan. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. Current and future portfolio holdings are subject to risk. Risks may include interest-rate risk, market risk, inflation risk, deflation risk, currency risk, reinvestment risk, business risk, liquidity risk, financial risk, and cybersecurity risk. These risks are more fully described in Telemus Capital's Firm Brochure (Part 2A of Form ADV), which is available upon request. Telemus Capital does not guarantee the results of any investments. Investment, insurance, and annuity products are not FDIC insured, are not bank guaranteed, and may lose value. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products. The S&P 500 index includes 500 leading companies in the US and is widely regarded as the best single gauge of large-cap US equities.

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