A Good Economy Tops Low Rates

In comments on the market, Daniel Berkowitz, senior investment officer for investment manager Prudent Management Associates wrote:

Stocks are trading higher today following a better-than-expected GDP reading for the fourth quarter, which rose at an annual rate of 2.9%. The reading came in slightly above economists’ expectations, but lower than the third quarter’s growth rate of 3.2%.

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Q4 2022 hedge fund letters, conferences and more

Of note from the data print, consumer spending, which represents the driving force behind the US economy, grew at a 2.1% rate—steady, though slightly below the reading from the third quarter. Consumers have been cutting back on discretionary spending of late and drawing down on leftover cash from pandemic-era stimulus and savings.

To be sure, household balance sheets still remain generally strong, though the personal savings rate as a percentage of disposal income currently sits near 2008-crisis lows. Though we expect consumer spending to continue to moderate, strong wage growth as a result of a still tight labor market may continue to buttress spending over the coming months.

This morning’s GDP data does suggest that the Fed has leeway for further rate hikes without crushing the economy, though caution is warranted. Monetary policy tends to transmit throughout the economy with a lag, though in an era of abundant forward guidance from the Fed, such a lag may be shorter relative to previous hiking cycles.

With that said, arguably more important than a likely 25 basis point rate hike will be the upcoming earnings reports from large technology companies later this week and into early February. Support for this is the pall Microsoft Corp (NASDAQ:MSFT) put over the market with its tepid earnings report.

Even with last year’s punishing selloff, these firms still represent a large percentage of the S&P 500 Index’s market capitalization and contribute a large share of aggregate earnings. A set of much weaker-than-expected reports from these firms could dent the market’s strong start to 2023.

This morning’s jobs report notwithstanding, we are keeping our eye on the rapid reduction in temporary workers here in the US. Employers made significant cuts to temporary jobs during the back end of 2022.

There are a few potential explanations for this trend and not all of them are ominous, though such reductions may signal future stress in the labor market ahead. Further, there is a possibility that the impact of recent job losses in the tech sector and beyond could be reflected in future readings, but for now, the labor market is showing resilience.

We remain cautiously optimistic that the recent macroeconomic picture, while still gloomy, is perhaps less gloomy than a few months ago. We maintain a positive outlook on equities for the intermediate term and believe, for the moment, economic data is pointing to a “soft-ish” landing for the economy this year, which is a net positive in our view.

About Prudent Management Associates

Prudent’s core investment philosophy focuses on minimizing risk over time. As a result, the company does not react to market events, but rather considers them in a larger context to develop a long-term outlook for the development and maintenance of investment portfolios.

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