High Frequency Data Tracker 12/23/2022

First Trust Economics

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 12/23/2022

We live in unprecedented times. The recession in 2020 was not so much a recession as it was a lockdown. Using “normal words” to describe the economy in the last 2 years, we believe, does not make sense. Now with two consecutive quarters of declining real GDP, many are saying we are back in a recession. The charts in the High Frequency Data Tracker follow data that are published either weekly or daily, providing a good real-time look at where the economy stands. As of now we believe these measures, along with other monthly economic data coming in, show we are not in a recession.

To view more important information click on the link below!

https://www.ftportfolios.com/Commentary/EconomicResearch/2022/12/23/high-frequency-data-tracker-12232022

Still Unprecedented

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

December 19, 2022

What a difference a year makes!

One year ago the Federal Reserve was forecasting that real GDP would grow a strong 4.0% in 2022, that PCE prices would be up a relatively moderate 2.6%, and we should expect a grand total of three 25 basis point (bp) rate hikes by the end of the year.

Instead, it looks like real GDP will be up about 0.5%, PCE prices will be up 5.6%, and we had the equivalent of seventeen 25 bp Fed rate hikes, finishing the year at 4.375%. So, if you feel a little dizzy about all of this, imagine how the Fed feels.

For 2023, the Fed is forecasting another year of 0.5% real GDP growth, inflation of 3.1%, and the unemployment rate rising to 4.6%. As for Fed policy, the dot plot shows another 75 bps of rate hikes in 2023, and no planned cuts.

We think growth will undershoot the Fed’s forecast in 2023. Instead of growing 0.5% in 2023, we expect real GDP will shrink about 0.5%. Meanwhile, we think inflation will overshoot: ending next year above 4.0%. Sure, inflation moderates in 2023, but not as much or as fast as many expect.

What does that mean for the Fed? While others obsess about short-term interest rates, we still think investors (and the Fed) should pay more attention to the money supply, M2 in particular. M2 surged in 2020-21, hitting a peak of 27% yearover-year growth and rising a cumulative 40%. But in the past year, M2 growth hit a wall, and is up just 1% from a year ago. If accurate, this means economic activity is likely to slow very sharply – and soon.

However, we think some of this decline in M2 growth is because the Treasury General Account at the Fed (the Treasury’s checking account) grew from $100 billion at the end of 2021, to a current level of $600 billion. In other words, the Treasury has extracted roughly $500 billion of M2 from taxpayers and bond buyers and put it aside in an account that does not count as M2. If we adjust M2 for this sleight-of-hand, M2 is up roughly 4% in the past year, not 1%.

We also can’t rule out the possibility that measurement error has led to the Fed miscalculating M2. If M2 has really slowed to 1% in the past year, it’s hard to figure out how total bank credit is still up more than 7% from a year ago.

If their calculations are true, the dramatic slowdown in M2 growth in 2022 would be entirely consistent with a recession starting sometime in 2023. But, so far, we don’t see evidence of any large squeeze in overall economic liquidity.

Lurking in the background of all these forecasts, including our own, is the fact that we are in unprecedented times. Forget COVID lockdowns; every prior episode of inflation in the post-World War II era was accompanied by the Fed operating in a “scarce reserve” system, whereby it would tighten monetary policy by draining reserves from the banking system to make short-term interest rates move higher. Meanwhile, those reserves would generate zero income for the banks unless they lent them to other banks.

Now, for the very first time with high inflation, the Fed is operating in an “abundant reserve” system, trying to tighten monetary policy by directly paying banks higher interest rates to hold the copious reserves that well exceed banks’ needs. The continued growth in bank credit suggests that, so far, this experiment in monetary policy is not quite going according to plan.

Interest rates all along the yield curve remain below every economic model of neutral rates (i.e. The Taylor Rule). The Fed has held the federal funds rate below inflation for 90% of the past thirteen years. This is all part of the unprecedented policies that investors must analyze and deal with.

Put it all together and the only thing we’re confident about is that whatever happens in 2023, it will likely look very different from what the Fed is forecasting.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

S&P 3,900 – Dow 33,000

Predicting stock values in 2023 is tough. Unprecedented actions during COVID leaves a wide range of possible outcomes. Let us explain.

As always, we start out with our Capitalized Profits Model. That model takes a government measure of nationwide profits from the GDP report, discounted by the 10-year US Treasury yield, to calculate fair value for stocks. These data go back to the early 1950s, so almost seventy years. Our measure of profits, which excludes the profits earned by the Federal Reserve system, were up 2.0% in the third quarter, are up 7.8% from a year ago, and are up 23.4% versus the pre-COVID peak. One interesting thing to think about is that while profits rose 7.8% during the year ending in Q3, the GDP Price Index was up 7.1%. Very slow growth in inflation-adjusted profits and higher interest rates combined to push stock values down in 2022.

Using a 10-year Treasury yield of 3.6% (near the Friday close) to discount profits suggests the S&P 500 index is fairly valued at about 3,700. At a 10-year Treasury yield of 4.0%, fair value would be down to 3,350. Fair value for the S&P 500 index would also be about 3,350 if the 10-year yield stays at 3.6% and profits go down 10%, which is what we’d expect to happen in a recession.

What happens if the 10-year yield goes up to 4.0% AND we get a recession? Then fair value would be 3,000. The problem with this scenario is that if we do get a recession, the 10-year yield is unlikely to stay as high as 4.0%. So, it appears that there will be no double-whammy for stocks. However, if even one of these downside risks occurs – higher rates or a profits recession – and fair value drops, even temporarily to 3,350, then stocks will likely spend some time below 3,350, just because stocks always vary above and below actual fair value. That suggests a low for the S&P 500 of about 3,200.

Our forecast is that the US economy enters a recession around mid-2023, for two reasons. First, we never fully felt the impact of lockdowns because we flooded the system with liquidity and borrowed money. Second, monetary policy is now in reverse. And a monetary policy tight enough to slow inflation is likely to generate a recession, as well. It’s hard to see the Fed going from very rapid M2 growth in 2020-21 to essentially zero M2 growth in 2022 without the economy, at least temporarily, hitting a brick wall.

However, stocks are likely to bottom within the first few months of the recession as investors realize this is not another Financial Panic like in 2008-09. That would give stocks room for a rally late in the year even if a recession continues, as equities see the light at the end of the tunnel.

As a result, we are comfortable with a forecast of the S&P 500 finishing next year around 3,900 with the Dow Jones Industrials Average at about 33,000. Not much change from where we are today.

Obviously, if it turns out that the Chairman Powell and the Federal Reserve have engineered a soft landing – no recession in 2023 and with the market ending 2023 confident of not having a recession in 2024 – then stocks should rally substantially in 2023 and easily beat our S&P 500 target of 3,900. By contrast, if it turns out a recession starts later in 2023, providing less time for a rally from the bottom, or if a recession turns deeper than we expect, then stocks could finish 2023 substantially below 3,900.

The bottom line is that while stocks suffered this year from higher interest rates, the greatest headwind in 2023 should be lower profits. We expect the next bull market will be prolonged and strong. But, for the time being, the economy still needs to pay a price for the massive artificial stimulus of 2020-21. Part of that bill came due this year and we think the rest comes due in 2023.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.

A Plow Horse With Shin Splints

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

December 5, 2022

Our position on the economy has been that the US is headed for a recession, but we’re not quite there yet. Nothing in all the recent data reports changes our minds. Look for a recession to start in the second half of 2023, with some possibility of it starting earlier in 2023 and some possibility of a delay until early 2024. Until then, expect mediocre economic growth.

We called the recovery after the Financial Panic and Great Recession of 2008-09 the “Plow Horse Economy.” Real GDP growth averaged 2.2% annualized in the eight years after that recession ended. That was very slow by historical standards and we think it was due to a large expansion in the size and scope of government. The bigger the government, the smaller the private sector, creating slower real growth.

It’s hard to tease out the underlying pace of growth so far in the current recovery because of the nature of COVID-related shutdowns. However, it looks like real GDP growth will be roughly +0.5% in 2022 (Q4/Q4), which would be slower than any calendar year without a recession since the end of World War II. Call it a “Plow Horse with Shin Splints.”

This description of the economy might surprise some investors, particularly given Friday’s robust increase in payrolls. But we think many journalists, analysts, and investors misinterpreted the employment report, which wasn’t as strong as the headline. Yes, payrolls rose a very solid 263,000 in November. But the most important data point each month is the change in the total number of private-sector hours worked, which declined 0.2% for the month. That’s the equivalent of losing about 250,000 jobs. Total hours worked are up at a modest 1.1% annual rate in the past three months, signaling slower job growth ahead.

The Atlanta Fed’s “GDP Now” model suggests real GDP growth at a 2.8% annual rate in the fourth quarter, but we think growth is very likely going to fall short of that pace; we’re penciling in growth at only a 1.5% annual rate, instead. In particular, look for the trade sector, which was the key behind more rapid growth in the third quarter, to be a major drag on growth in the final quarter of the year.

Another report we’re concerned about is the upward creep in continuing jobless claims. Continuing claims averaged 1.363 million in the four weeks ending October 1. In the four weeks ending November 19, they averaged 1.539 million. A jump like that is not the end of the world, nor does it show we’re in a recession already. But it probably signals that the low point in the unemployment rate is behind us (at 3.5%) and is another reason to think job growth will be slower in the months ahead.

The factory sector, in particular, is showing early signs of softness, with the ISM Manufacturing index coming in at 49.0 for November, the first sub-50 reading since the early days of COVID. Yet, the ISM Services index came in at 56.5, reflecting a catch-up from all the service closures during COVID.

If you want to weave a very negative story, you have the data to do it with. But it’s important to look at a full range of reports and not get captured by your own narrative. Some key parts of the economy remain solid. For example, sales of medium and heavy trucks were up 11.4% in November versus a year ago. Usually, this measure goes negative at least several months before a recession starts.

Put it all together and you have a weak economy that’s still growing but showing some signs of wear and tear. A Plow Horse, with shin splints. Stay tuned: rougher times are ahead, a recession is still in the future, but not happening today.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

This Rally Shouldn't Last

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

November 28, 2022

It’s that special time of the year, and we will all hear and read a great deal about Black Friday, Thanksgiving Weekend, and Cyber Monday during the next few days. Many pundits are going to make sweeping conclusions about the economy based on these very limited reports.

Our recommendation: please feel free to ignore this news. Christmas-time spending is a marathon, not a sprint. Slow sales early could be bad news, or it could just mean shoppers are waiting to pounce later; fast sales early could be good news, or it could mean consumers get tapped out sooner. Past patterns are no indication of this year’s results. Even more important: it’s not how much consumers are spending that matters, but how much the economy is producing, which is the ultimate source of future purchasing power.

Instead, focus on fundamentals, like monetary policy and corporate profits. It’s these fundamentals that determine the path of markets in the next year or so. And in that regard, the near future is flashing many warning signs.

With results in from 97% of S&P companies for the third quarter, according to FactSet, it looks like corporate profits are up only 2% from a year ago. We would not be surprised at all if the GDP report (due Wednesday morning) shows economy-wide corporate profits fell in Q3 and, given bottom-up earnings estimates so far, continue to decline in Q4.

The stock market depends on two important factors. Profits and interest rates. As the Federal Reserve has lifted short rates, the entire yield curve has risen, and higher interest rates have been a big drag on stocks. Now stocks look like they’ll also have to grapple with stagnant to declining earnings. This is why we think the recent rally does not signal the end of a bear market, just like the rally from mid-June through mid-August, which ended with the S&P 500 peaking just north of 4300.

The lowest close so far this year is 3577. We think the market will test that low and likely go lower before the next recession is through. (We will provide more clarity on what to expect in 2023 before year end.)

The only way the recent rally turns out to signal that the worst is behind us is if the US somehow avoids a recession. But with monetary tightening (highlighted by a significant slowdown in M2), avoiding a recession is unlikely. This is especially true when we add in the fact that much of the economy, especially in the goods sector, has to get back toward normal after being artificially supported by trillions in temporary stimulus in 2020-21.

Yes, some recent economic reports have been solid, including retail sales, manufacturing output, and new home sales. Meanwhile jobs have kept growing. But the link between tighter money and less economic growth is long and variable.

Back in 2020-21 we consistently said that the bill for massive over-stimulus would eventually come due. We are now much closer to getting that bill. Don’t let the time lag, or the belief that the Fed can reverse course just in the nick of time, convince you it’s not coming at all.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.

The Aftermath Economy

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

November 21, 2022

We will forever believe that locking down the economy for COVID-19 was a massive mistake. There is virtually no evidence that death rates were lowered by government mandates and lockdowns.

Business activity in certain sectors would surely have slowed as individuals protected themselves from COVID: think hotels, cruises, restaurants & bars, amongst other services. But the government didn’t have to aggravate the problem by applying a version of medical central planning. Doctors, epidemiologists, and scientists can be very good at coming up with treatments, cures, and vaccines, but they’re not equipped to weigh trade-offs that involve costs outside the medical arena, like loss of income or basic freedoms.

There is clear evidence that closing schools caused a harmful loss of learning, which could affect the incomes of future workers for decades, while paying people not to work has warped the labor force.

Economically, the United States ran up about $5 trillion in additional debt and boosted the M2 measure of the money supply by more than 40% during the pandemic, which caused a 40-year high in inflation. In turn, this inflation led politicians to release hundreds of millions of barrels of oil from the strategic petroleum reserve in an attempt to temporarily reduce energy prices.

In other words, the US enters the decades ahead with more debt, less spending power, an undereducated population, and less petroleum put aside for national defense. The US has made the future riskier.

At the same time, no one can know exactly what the near-term future looks like. Right now, the conventional wisdom is that the US faces a recession. Normally, we would disagree with the conventional wisdom, but this time we agree. Unwinding COVID policies will be painful.

Most people think that a recession is coming because the Federal Reserve is lifting interest rates. Last week, the US yield curve was inverted with 2-month Treasury bills yielding more than 30-year notes, suggesting that long-term investors think the Fed has gone too far.

Obviously, raising interest rates has hurt the housing market and imagining more economic damage to other sectors as these rate hikes bite seems straightforward. However, this is the first rate-hiking cycle in an inflationary environment under an “abundant reserve” model of managing monetary policy. The Fed has held interest rates artificially low for a very long time, and at least for now, the entire yield curve is still below current inflation rates.

But the real reason we expect a recession is that COVID policies severely distorted the economy. For example, from February 2020 through September 2022, real personal income increased just 2.6%, while real personal consumption climbed by 6.6%. And this happened with fewer people working because of lockdowns and overly generous unemployment benefits. We estimate that Americans have worked about 30 billion fewer hours during the past 2½ years than would have happened if COVID had never hit.

Yet, federal tax receipts hit 19.6% of GDP in 2022, a near record high, in spite of the lockdowns, while corporate profits jumped 23% between the end of 2019 and the second quarter of this year.

The US borrowed from future generations and handed out pandemic benefits that more than replaced lost earnings. Then it taxed the economic activity that this borrowing created, and kept small businesses closed in many states, while large public companies remained open. The result is that spending, profits, and tax receipts were all artificially lifted above normal. The whole economy got distorted and is still untwisting from those distortions.

It’s as if the US economy had a car accident and the emergency responders injected it with morphine. As this morphine continues to wear off – via rate hikes and smaller deficits – it is hard for us to imagine that these above normal trends will continue. In other words, a recession is in the cards.

And with that recession, profits are likely to fall. The combination of lower profits and higher interest rates create a headwind to markets and turbulence for investors.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Democrats Overperform

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

November 14, 2022

The Democratic Party substantially beat expectations on Tuesday, already having clinched control of the US Senate for the next two years and, for now, hanging on to a (very slim) possibility of keeping control of the House of Representatives. If they win the Georgia run-off in early December, their Senate majority will be one seat larger than it was for the past two years.

In the five states we thought would have the closest Senate races – Nevada, Pennsylvania, Georgia, Arizona, and New Hampshire – the GOP ended up competitive in four of them but coming up empty, unless they win the Georgia runoff. Oddly, Republicans appear to have fared well in the national vote total for the House, even while falling well short of expectations in terms of seats. That suggests they ran up the score in uncompetitive districts while losing narrowly in many competitive districts around the country.

It’s important for investors to recognize that even if the Democrats end up with narrow control of the House, they are unlikely to raise taxes in the next couple of years. Federal tax revenue was 19.6% of GDP in the fiscal year that ended September 30. That’s the highest on record with the exceptions of the peak of the first internet boom in 2000 and World War II.

At the same time, the Federal Reserve needs to impose a tight monetary policy to get inflation under control. As a result, the risk of a recession is unusually high. Moderate Democrats in “purple” states and swing congressional districts will be very reluctant to raise taxes. The Democrats will have to defend 23 of the 33 Senate seats that will be up for grabs in 2024, with about half of those 23 in “purple” or “red” states. None of them wants to be accused of raising taxes into a recession.

If the Republicans are able to hang onto some voting leads and narrowly take control of the House, that means every piece of legislation going to the president’s desk will have to be bipartisan. In that scenario, debt-ceiling cliffhangers are possible, but we don’t expect any Treasury debt defaults.

Another piece of major news last week was that a federal judge ruled the president’s actions on student loans – providing large-scale debt relief and limiting future payments relative to income – are unconstitutional.

Yes, the student loan law gives the president the authority to provide some relief. But, the court ruled, Congress can’t pass a law that circumvents the Constitution’s requirement that Congress itself must authorize federal spending. The Congressional Budget Office estimates that debt forgiveness alone (so, not including the cost of future limits on repayments) costs the federal government $379 billion, which is a huge amount of money for the president to spend without a direct appropriation from Congress.

Look for this issue to be a major bone of contention for the next year or so, but for the federal courts to ultimately strike down the Biden Administration proposal.

As we wrote last week, ultimately, the stock market will be dominated not by election results but by fundamentals, including higher interest rates this year and weaker profits next year. The election results are unlikely to have an effect on interest rates or corporate profits. Remember: whether you’ve been cheering or jeering the election results, don’t let that cloud your investing judgement. The bear market has further to go and a recession is highly likely in the next 18 months.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.

How will midterm elections impact the market?

MARKETS & INVESTING

October 28, 2022

CIO Larry Adam provides context ahead of the November 8 elections. Click the link below to watch full video.

https://www.raymondjames.com/commentary-and-insights/markets-investing/2022/10/28/how-will-midterm-elections-impact-the-market?utm_source=ccemail

All expressions of opinion reflect the judgment of the author, the Investment Strategy Committee, or the Chief Investment Office and are subject to change. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur.

Beware a "Gridlock Rally"

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

November 7, 2022

Election day is tomorrow and will bring results for key Senate, House, and Governors races from all around the country, plus local legislative races and more. For the federal races, our projection is that the Republicans are essentially a slam-dunk to take back the House of Representatives (98% likely) and very likely to take back the Senate (about 80%).

To be exact, our best guesses are that the GOP will end up with around 53 seats in the Senate (which, if exactly right, would be a gain of 3) and 240 in the House (which would be a gain of 28 seats compared to where the GOP finished in 2020). We’re confident we won’t get this exactly right, but, as of today, that’s how we see the races breaking.

If you want a scorecard for the Senate races, we suggest focusing on five elections, in particular: New Hampshire, Pennsylvania, Georgia, Arizona, and Nevada. To keep the Senate, the Democrats need to win at least four of those five races. Not impossible, but very unlikely; we’re projecting they win only one of these, not four. In particular, if the Republicans win New Hampshire, they are also likely to win at least one of those other four states (and, therefore, Senate control), you might be able to go to bed early tomorrow night.

If we’re right about the election outcomes, or even close, many stock market investors might take it as a reason to be bullish. The result would be “gridlock,” which means no major federal legislation could be enacted unless it got significant bipartisan support.

Gridlock has been good for stock market investors in the past few decades, particularly when there’s been a Democratic president and the Republicans in control of at least one house of Congress. For example, under President Clinton, from the market close on election night 1994 – when the Republicans took control of both houses of Congress for the first time in forty years – to the end of the Clinton presidency, the S&P 500 generated a total return of 20.7% per year. Under President Obama, from the close on Mid-Term Election Night 2010 – when the GOP took the House and made gains in the Senate – through the end of his presidency, the S&P 500 generated a total return of 13.3% per year.

But there are some big differences between the current economic situation and those other two episodes. In November 1994, consumer price inflation (on a year-ago comparison basis) was running at 2.7%; in November 2010, the CPI was running at 1.1%. Right now, inflation is running north of 8.0%, and the Fed is ratcheting up rates no matter who wins.

Back in the 1990s, theoretical “gridlock” ended up being a mirage, as President Clinton and congressional Republicans ended up agreeing on welfare reform, trimming Medicare, cutting the capital gains tax, and expanding free trade. If scandal hadn’t interceded late in the Clinton presidency, even Social Security reform would have been possible. President Obama and congressional Republicans agreed on much less, but “gridlock” meant no more expansion of entitlements, like health care, and did result in a compromise that extended much of the Bush tax cuts originally enacted in 2001-03.

If the stock market soon rallies broadly because investors think a current episode of gridlock under a Democratic president will end up looking like the last two, we think they end up disappointed; the rally will fade, just like the bear-market rally we had this past summer (mid-June to mid-August).

This doesn’t mean investors should ignore the election results. Who wins and loses should have an influence on which sectors might do better for at least the next couple of years. But expecting a quick and broad end to the bear market is expecting too much.

The same goes for a rally that might materialize if and when the Federal Reserve stops raising short-term interest rates next year. Yes, investors might bid up stock prices initially in relief. But that rally should fade, as well.

Ultimately, the stock market will be dominated not by election results but by fundamentals. Higher interest rates have been the key headwind for stocks this year; next year it’s likely to be weaker profits as the “sugar high” of stimulus fades.

The election results tomorrow are unlikely to have an effect on interest rates or corporate profits in 2023. Meanwhile, President Biden is very unlikely to start cutting tax rates, government spending, or regulations that impede energy production. Vetoes and Executive Orders are more likely.

If you like one political side or another, we’re sure tomorrow will give you reasons to cheer or jeer. But don’t let your personal political preferences cloud your judgement. The bear market has further to go and a recession is highly likely in the next 18 months, no matter what the outcome.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.

How Fast, How High, How Long

First Trust Economic Research Report

Brian S. Wesbury - Chief Economist

Robert Stein - Deputy Chief Economist

November 2, 2022

The Federal Reserve plans to keep raising rates at future meetings, but at a slower pace than it has for the last four meetings. Today the Fed once again voted unanimously to raise rates by three-quarters of a percentage point – 75 basis points (bps) – bringing the target for the federal funds rate to 3.75 – 4.00%, but far more attention is being paid to the path forward from this point. While today’s statement was not accompanied by updated rate forecasts from the Fed (our next look at the dot plots comes in December), it’s clear a shift is on the horizon.

The Fed statement released today included much of the same text seen following their September meeting, with a few key additions. First, the Fed noted it anticipates ongoing hikes will be appropriate until they have reached “a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.” What level will prove sufficiently restrictive? Nobody – including the Fed – knows. Coming into 2022, the Fed thought that cumulative hikes of 75 basis points (bps) would be enough to quell inflation this year. Then in March it became 175 bps, in June it was 325, and as of September it was 425. During the press conference, Powell said the restrictive level now looks even higher.

The second key addition to today’s statement was a sentence that the Fed will take into account the “lags with which monetary policy affects economic activity and inflation.” In other words, the Fed is moving towards a more measured pace of rate hikes while they wait to see how this year’s actions to-date flow through the system.

These changes set up Powell to clarify during the press conference how they are now thinking about where they need to move on rates, which rests on three questions: how fast, how high, and how long? The Fed has moved quickly to raise rates, after clearly starting late. Now the focus is shifting to the other two questions. How high will rates ultimately have to go and how long will the Fed keep rates elevated to bring inflation into check. While the pace of hikes may begin to slow, they are likely to end higher – and remain there for longer – than was previously anticipated. The fight against inflation is far from done. Today’s actions represent a pivot in how they are approaching the fight.

Our biggest concern is that the Fed continues to ignore the M2 measure of the money supply and not one reporter asked a question on the topic. While Powell was questioned on the topic at a recent conference by the Cato Institute, he brushed the idea off and continued to push the same tired model of inflation that has left the Fed well behind the curve and constantly revising forecasts higher.

The bottom line is that it’s good the Fed has prioritized the fight against inflation, but it remains overly optimistic in the effectiveness of its policies to get inflation under control. Follow the growth of M2 – which has thankfully slowed and must remain low for the foreseeable future – for guidance on the path forward from here.

Text of the Federal Reserve's Statement:

Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3-3/4 to 4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.

To view this article, click here.

This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

Fed Raises Interest Rates by 75 Basis Points

November 4, 2022

Dear Friends and Clients,

The U.S. Federal Reserve (Fed), in keeping with its aggressive efforts to curtail inflation, announced its fourth consecutive interest rate hike of 75 basis points (bps) at the November Federal Open Market Committee (FOMC) meeting. That brings the cumulative increase year to date to 375 bps and marks the sixth interest rate hike since March 16, when the Fed’s tightening cycle commenced.

“The Fed is expected to continue raising interest rates at least one more time this year, and then one to two more increases next year. During its December FOMC meeting, we expect the Fed to increase the federal funds rate by another 50 basis points, and then two more 25 basis point increases in February and March of 2023,” said Raymond James Chief Economist Eugenio J. Alemán, Ph.D.

As inflation concerns and talk of a recession lingers, there’s some uncertainty in the air. You may have asked yourself: “How will these factors impact my portfolio?” It’s a normal question to pose when the word “recession” is whispered, and market fluctuations are ever present. As your financial advisor, we’re here to help assuage your concerns and work with you through this period.

While what’s transpiring may feel out of the ordinary, we have seen market pullbacks and corrections before. They are necessary to sustain a healthy market.

You’ll likely recall in our previous conversations our emphasis on developing a tailored financial plan that’s focused on long-term financial goals. What’s currently happening illustrates the importance of that approach.

“We encourage investors not to focus on daily headlines and certainly not to make investment decisions based on those headlines,” said Raymond James Chief Investment Officer Larry Adam. Here are some key facts to bear in mind:

  • Markets are cyclical, and long-term returns have been historically positive

  • Missing even a few trading days in an attempt to time the market can significantly impact your returns

  • Temporary pullbacks may present an opportunity to strategically add to your portfolio

As always, we look forward to speaking with you to discuss these matters as well as address any questions or concerns you may have.

Thank you for the trust you place in us.

Sincerely,



Investment advisory services offered through Raymond James Financial Services Advisors, Inc. and Goodrich and Associates, LLC. Goodrich and Associates, LLC is not a registered broker dealer and is independent of Raymond James Financial Services, Inc. All expressions of opinion reflect the judgment of Raymond James’ Chief Economist and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. Investing involves risk, and you may incur a profit or loss regardless of the strategy selected.

Drop in Budget Deficit is a “Sugar High”

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

October 31, 2022

After nearly three years of the economic and financial market distortion due to COVID lockdowns, money printing, and massive government borrowing, some of these distortions are subsiding. For example, the federal budget deficit in FY2021 was $2.78 trillion, but for FY2022 (which ended on 9/30), it fell to $1.375 trillion.

As you would expect, some are treating this as huge progress toward fiscal sanity. But we beg to differ.

First, the budget deficit as a percent of GDP was 5.5% of GDP last year, the eighth largest since 1947.

Second, because of the way government accounting is done, the Biden Administration’s policy to forgive some student loan debt added $426 billion to the deficit and will likely add substantially more as we get details on the proposal to limit future repayments based on income. In other words, policymakers in Washington, DC are still itching to come up with new ways to ramp up spending.

Third, the federal government spent 25.1% of GDP last year. With the exception of the COVID years, FY2022 spending as a share of GDP was the highest for any year since World War II. That’s right, this is even higher than the peak year of the Financial Panic (FY 2009), when spending peaked at 24.3% of GDP. What makes this even more astonishing is that the unemployment rate averaged 3.8% during this past fiscal year, compared to 8.5% in FY 2009.

And this begs the question: With government spending so high, how in the world did the deficit decline so much? The answer: a surge in government revenue. Revenue hit 19.6% of GDP in FY 2022, only surpassed by the last two years of World War II and the year 2000, during the dot-com boom.

Individual income tax receipts soared 29% last year, to an all-time record high, and were $1 trillion above the level of FY2020. What makes this surge in revenue so unique is that in the past 31 months (since March 2020) US workers have worked 31.2 billion fewer hours than they would have if employment would have remained flat at its February 2020 level. That’s a lot of lost production, yet the Federal Government keeps raking in more revenues.

How? Because the massive fiscal and monetary stimulus of 2020-21 was essentially economic morphine that policymakers used to mask (part of) the pain of unprecedented COVID-related shutdowns. That morphine artificially and temporarily boosted economic activity and has now led to the highest inflation in forty years. Nominal wages and profits surged, and so did government revenue. In a sense, the government borrowed from future generations to hand out checks and then taxed its own stimulus back after it circulated in the economy. This “sugar high” can’t and won’t last.

But now, because of high inflation, the government is pulling back on the monetary morphine. Although we don’t think a recession has started yet, we think a recession is on the horizon, which means the fiscal picture in 2023-24 will not be anywhere as good. Look for bigger budget deficits the next few years as the revenue “sugar high” wears off.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

The Last Hurrah?

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

October 24, 2022

Most investors we talk to think the US is already in a recession or that a recession will start by the end of 2022. We think they’re wrong on both counts.

Yes, we are fully aware that the reports on real GDP growth for the first two quarters of the year were negative. But, as economists, we are also aware that the GDP reports will be revised once a year for the next several years and are confident they will ultimately show positive growth. Why? Because the unemployment rate has dropped, payrolls have grown at a very rapid pace, and industrial production continues to climb.

Don’t get us wrong; we’re not “recession deniers.” We think a recession is coming because monetary policy will have to get tight enough to bring inflation back down and a monetary policy tight enough to do that is also likely to drag the economy into a recession. We’re just not there yet. We expect a recession to start in the second half of 2023, with some risk of it starting in either the first half of 2023 or first half of 2024.

In the meantime, as set out below, our calculations show economic growth at a 3.0% annual rate for the third quarter, which is probably going to be the fastest growth we see for any quarter from now until the next recession is done.

Consumption: “Real” (inflation-adjusted) retail sales outside the auto sector declined at a 1.4% annual rate in Q3 while sales of autos and light trucks slipped at a 0.4% rate. However, it looks like real services, which makes up most of consumer spending, should be up at a solid pace. Putting it all together, we estimate real consumer spending on goods and services, combined, increased at a modest 1.0% rate, adding 0.7 points to the real GDP growth rate (1.0 times the consumption share of GDP, which is 68%, equals 0.7).

Business Investment: We estimate a 5.8% annual growth rate for business equipment investment, a 7.4% gain in intellectual property, and no change in commercial construction. Combined, business investment looks like it grew at a 5.6% rate, which would add 0.7 points to real GDP growth. (5.6 times the 13% business investment share of GDP equals 0.7).

Home Building: Amid higher mortgage rates and buyer skittishness, residential construction looks like it fell at a 16.5% annual rate. A decline at a 16.5% rate would subtract 0.8 points from real GDP growth. (-16.5 times the 5% residential construction share of GDP equals -0.8).

Government: Remember, only direct government purchases of goods and services (not transfer payments like unemployment insurance) count when calculating GDP. We estimate these purchases – which represent a 17% share of GDP – grew at a 0.6% rate in Q3, adding 0.1 point to real GDP growth. (0.6 times the 17% business investment share of GDP equals 0.1).

Trade: Exports remain very close to all-time highs in Q3 while imports have declined sharply, in part a reflection of businesses with too much inventory cutting back on foreign purchases. That means a smaller trade deficit. At present, we’re projecting net exports will add 2.7 points to real GDP growth, although a report on the trade deficit in September, which arrives on Wednesday, may alter that forecast.

Inventories: Inventories look like they grew at a slower pace in the third quarter than they did in Q2, suggesting a drag of about 0.4 points on the growth rate of real GDP. However, just like with trade, a report out Wednesday may alter this forecast.

Add it all up, and we get 3.0% annual real GDP growth for the third quarter. An economic storm is coming. The sun is still shining today, but, with almost all the net growth in Q3 coming from the trade sector, the clouds are forming on the horizon.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected

Second Thoughts on Bernanke’s Nobel Prize

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

October 17, 2022

The Nobel Prize in Economics was recently awarded to former Federal Reserve Chairman Ben Bernanke, as well as professors Douglas Diamond and Philip Dybvig, for their work on understanding the role banks play in the economy, especially during a financial crisis.

All three of them have done important work that’s worthy of recognition.  Banks are key parts of the economy that, by assessing the creditworthiness of borrowers, help channel the savings of households and companies into productive investment.  Bank failures, in turn, threaten to make it tougher for an economy to direct savings to where they’re most useful.

However, like many recent Nobels this award seems to ratify expansionary government policy.  Bernanke’s approach to the Financial Panic of 2008-09 included a massive bailout of the financial system, monetization of government spending, and a huge expansion in the Federal Reserve’s balance sheet.

The Bernanke approach did not include fixing mark-to-market (MTM) accounting, which was the key ingredient that turned a limited financial fire into a raging inferno that almost burned down the entire US financial system.

To review, in late 2007 the Financial Accounting Standards Board (FASB) forced financial firms to use market prices to value securities, rather than models or cash flow. Within a year, the U.S. was in the middle of the worst financial panic in a hundred years. This was not a coincidence.

On the surface, MTM made sense.  Markets usually provide transparent and verifiable prices, so companies couldn’t just make up numbers.  The problem is that market prices often deviate – sometimes substantially, but always temporarily – from underlying fundamental value.  Since markets are forward looking, MTM forced financial firms to take hits to capital over something that might happen in the future but hadn’t happened yet.  It was like forcing homeowners to come up with more capital as a hurricane approaches because their homes might get destroyed.

This, in turn, created a vicious cycle as capital constraints hurt banks, undermined the economy and drove asset prices lower, and then destroyed more capital.  In 2008, when markets for even prime mortgage-backed securities became illiquid, the financial crisis intensified.

Finally, in March 2009, six months after TARP and QE were put in place, the stock market was still falling.  That’s when Congress (specifically, Barney Frank) started to twist arms, forcing FASB to loosen up its rules and allow cash flow to be used when markets were illiquid.  This seemingly small adjustment did the trick.  Banks were finally able to raise new capital, the stock market surged, and the economy started a long and sustained recovery.  This was no mere coincidence, but Ben Bernanke, as far as we know, has never publicly discussed it.

We find that odd because Bernanke should be familiar with the damage MTM can do.  Bernanke is a student of the Great Depression and Milton Friedman won the Nobel Prize for his work on the Great Depression, as well.  In addition to his focus on the money supply, Friedman also wrote about how a MTM rule in the 1930s caused many banks to fail.  Not coincidently, the Roosevelt Administration suspended MTM in 1938 and, simultaneously, the Depression ended.

We, and others, including Peter Wallison, have written extensively about the economic damage done by the MTM accounting rule…especially to the financial markets.  Yet, the Fed, other government agencies, and academics have ignored it.  Apparently, even if you have solid evidence that TARP and QE really didn’t end the 2008 Panic, you should be ignored.   The only narrative allowed is that free markets caused the crisis and the government saved us. 

And now, Nobel Prize or not, the bill is coming due on the “abundant reserves” monetary model that is the result of Bernanke’s research.  The US has its highest inflation rate in 40 years.  True, this didn’t happen in the aftermath of the 2008-09 crisis, because the M2 measure of money remained more stable.  But government spending surged much more during COVID and Bernanke’s new system monetized it.

Having some insights into the role banks play in an economy is not the same as fully understanding the economy.  And dismissing the role of MTM accounting seems intellectually dishonest.  We have second thoughts about anyone who does.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

The CPI Is Important, But What Else Are Inflation Watchers Watching?

The Consumer Price Index gets a lot of attention each month, but it’s not the only game in town.

When it comes to measuring inflation, investors and policymakers have a full menu of alphabet-soup metrics to choose from—the CPI, the PPI, the PCE, the GDP Index, and a host of others. But the Consumer Price Index (CPI)1 typically grabs most of the headlines—and for good reason. From determining the size of next year’s Social Security checks to influencing the amount of interest that owners of Treasury Inflation-Protected Securities (TIPS)2 will earn, time and time again, the monthly CPI print has moved markets and dictated the course of US monetary policy. But as a classic lagging indicator, the CPI has often been criticized for reflecting trends that are already out of date; critics also say it uses methodologies that may be prone to error or subtle biases (see page 4 for more on this).

For the average consumer or casual investor, the so-called “headline” CPI number— the figure that also includes volatile food and energy prices—may be sufficiently revelatory. The August report, for example, showed that the annualized rate of inflation stood at 8.3%, slightly lower than July’s 8.5%. While the small statistical retreat was largely attributed to moderating energy costs, analysts zeroed in on underlying month-to-month price increases in the cost of food, new cars, housing, and electricity, and natural gas, which suggested to the Federal Reserve (Fed) and other stakeholders that inflation was (and is) still a thing.3

But many economists, investors, and other serious inflation-watchers, who hope to unearth trends that the CPI may overlook, will often train their focus on alternative inflation measures, which can sometimes provide a broader, more nuanced, view of the direction and timeliness of price movements. Let’s look at some of the more prominent alternative inflation measures.

To read the whole article click on the link below!

https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/WP708.pdf