April 9, 2024 – Have you noticed in your conversations, as I have recently, more instances of a disconnect between perceptions of the economy and actual economic data? In the U.S. and around the world we are still feeling the effects of inflation following COVID, particularly in the expenses of daily living. But, as documented in a recent Wall Street Journal poll, the current state of the economy is much more positive than much of media has led us to believe: “In The Wall Street Journal’s latest poll of swing states, 74% of respondents said inflation has moved in the wrong direction in the past year. This assessment, which holds across all seven states, is startling, sobering—and simply not true. . . . If hard economic data count for anything, we can say unambiguously that inflation has moved in the right direction in the past year.” [i] In the U.S., the Consumer Price Index (CPI) peaked at 9.1% for the 12 months ending in June of 2022. One year ago, the rate was 6.0% now the most recent reading stands at 3.2%, a dramatic improvement.
Some of this disconnect in our perception and the current data comes from the difference in terminology between the inflation rate and the lingering effects of inflation on prices. Very few prices decline after inflation cools, but people’s present view of inflation is often anchored to the price prior to the inflationary period. When discussing inflation, economists are referencing the current rate of change in prices, not the nominal prices. Prices today are still rising, but at a slower, more normal pace than two years ago.
However, it is not only our perception of inflation that is skewed:
By 47% to 41%, more Journal poll respondents think their investments or retirement savings went in the wrong direction in the past year—a period in which the stock market roared to record highs, home values held steady or rose, and interest on savings went up. . . . By more than 2-to-1 (56% to 25%), respondents said the economy had gotten worse rather than gotten better over the past two years. That is difficult to square with robust employment growth, unemployment near its lowest in half a century, or growth in gross domestic product, which actually accelerated last year.[ii]
Economic factors affect people and families differently depending on their circumstances. And the effects of the 2022 inflation on the price of everyday goods is still a struggle for many. Yet, there seems to be widespread negativity in news media, and economic news is no exception.[iii]
Further, it is worth analyzing how we get our information. In the last two decades, our ability to curate our own exposure to news and information has exploded. In the past, we selected a TV or radio channel, a newspaper, or magazine of our choice and heard or read what was presented. Our ability to manage the content was limited. Now we have the tools to curate our news and information, and so the burden is on us to be mindful of what information we are consuming and what we are excluding. We can risk limiting our intake to match our preferences. In addition, much of what is produced by news outlets is instead only commentary which is typically tailored to a particular viewpoint. As the Wall Street Journal article puts it, “People consume media that confirms their biases, and media – especially social media, with its finely tuned algorithms – tend to give consumers what they want.” [iv]
What we spend time consuming and considering affects our beliefs, our philosophy ultimately becomes the basis of our decisions, financial and otherwise. We welcome discussion of these topics. As part of advising clients, we make a priority of staying informed of economic news (and commentary) and we manage portfolios based on financial data and an informed, personalized strategy.
| Market Total Returns (including dividends) | Jan. – Mar. | 2024 | |
| Large Co. U.S. Stocks | S&P 500 | +10.56% | +10.56% |
| Small Co. U.S. Stocks | Russell 2000 | +5.18% | +5.18% |
| Foreign Stocks | DJ Global (ex. U.S.) | +4.38% | +4.38% |
| U.S. Taxable Bonds | Bloomberg U.S. Agg. Bond | -0.78% | -0.78% |
| Tax-Free Bonds | Bloomberg Municipal Bond | -0.39% | -0.39% |
| Commodities | Bloomberg Commodity Index | +2.19% | +2.19% |
U.S. Stocks
After a 26% return for S&P 500 in 2023, the major U.S. stock indexes started the year with strong gains: 10.56% for the index including twenty-two new all-time highs during the first quarter. The leadership in the market is broadening with 10 of 11 S&P sectors in positive territory for the quarter led by Communication Services and Energy, while the usually dominate Technology sector was third. Even with the prospect of interest rate cuts now delayed until mid to late 2024, the market has recently seemed more focused on the strong economy and quality company fundamentals such as sales, earnings, and profit margins.
Foreign Stocks
European and Japanese stock markets reached all-time highs in the first quarter. Japan has benefited from a weaker Yen and a welcome return of higher inflation. Japan’s TOPIX Index surpassed a high set thirty-three years earlier. In Europe, healthcare stocks have led with a boost from Novo Nordisk’s diabetes and obesity drug Ozempic. In addition, central banks around the world will likely follow the lead of our Federal Reserve and cut rates later in 2024. We see continued opportunity in Europe and Japan. We expect emerging market countries outside of China to also benefit from global growth, though the stronger dollar has weighed on recent returns.
Fixed income
With the economy continuing to grow, though more slowly, we continue to favor bonds with higher credit quality over lower. For longer-term bond allocations in portfolios, we have taken advantage of higher rates in intermediate and longer maturity bonds by extending the range of maturities. To reduce interest rate bets, we “ladder” portfolios of individual bonds with similar dollar amounts in each maturity from two years to, now, seven years.
We use tax-exempt municipal bonds when appropriate in taxable accounts. In retirement accounts and other tax-free or tax-deferred accounts, we invest in taxable fixed income securities including CDs, treasuries, government agency bonds, and corporate bonds. For a short-term objective, we may hold money market funds for daily liquidity with yields remaining above 5%. These cash or near-cash investments have reinvestment risk if rates decline as most expect over the coming months.
[i] Ip, G. (2024, April 4). What’s wrong with the U.S. economy? it’s you, not the data. The Wall Street Journal. https://www.wsj.com/economy/consumers/whats-wrong-with-the-economy-its-you-not-the-data-cfa911e6
[ii] Id.
[iii] Id. “A recent study of online news in Nature found that each negative word in a headline increases the click-through rate by 2.3%.”
[iv] Ip. G. (2024, April 4). What’s wrong with the U.S. economy? it’s you, not the data. The Wall Street Journal.
https://www.wsj.com/economy/consumers/whats-wrong-with-the-economy-its-you-not-the-data-cfa911e6