We’re not sure that our Christmas wish came true as the year comes to a close. The economy isn’t quite where we would want it to be had Santa come through for us. But data is the gift that keeps on giving. When you operate on data-driven principles as we do… well, the slew of end-of-year data can be just plain fun to dig into, even if it doesn’t tell you what you want to hear.
Unfortunately, the data we’re looking at now is less than ideal. The reports rolling in on most of the economic factors and trends that we watch closely are signaling that the economy is continuing to slow down. Let’s take a look at a few of them.
First, the good news. The Baltic Dry Index, which measures the cost of shipping goods worldwide, rose about 3.1% to 1,596 points, its highest since late October. This implies that demand for moving goods is still robust – a healthy sign.
The rest of our data points are not as encouraging. Take for example the US Manufacturing and Services Purchasing Managers’ Index (PMI). This is a measure of the activity level seen by purchasing managers in the manufacturing and services sectors. Generally, 50 and over is healthy expansion, while under 50 suggests contraction. In December, the PMI fell to its lowest level since the height of the pandemic in May 2020 and currently sits in the mid-40s.
Meanwhile, stock margin balances keep falling. According to reports from the Financial Industry Regulatory Authority (FINRA), debit balances in the securities margin accounts held by consumers have plunged to their lowest levels since 2009. Translation: investors are pulling money out of these accounts as their confidence in the economy continues to weaken.
We can also see some unfortunate trends when we zoom in on specific industries. Take housing, for example. According to a Bloomberg report, total housing permits are down more than 22% year-over-year, representing the biggest drop in new housing since 2009. (Of note, single-family permits are down almost 30% while multi-family permits are only down 10.7% – this is likely due to a glaring need for more affordable housing options across the country.)
What about logistics, you ask? In a sign of times, shipping giant FedEx is planning massive spending cuts to the tune of $1B in response to anticipation of softer demand in 2024.
We recognize that most people don’t love data as much as we do. The average American is more concerned with inflation, how it affects their wallet, and what to expect in that regard in 2023. It’s a mixed bag, really. We expect inflation to come down from its current record highs, but it will still be higher than normal well into the new year.
The Fed is committed to tackling these runaway inflation rates (good) by continuing to raise interest rates (not good.) In effect, this means that any good news – like historically low unemployment rates, higher corporate profits, and wage increases – is actually bad news. The Fed is using a metaphorical sledgehammer to address inflation, rather than a more nuanced, surgical-like approach. The market is currently not pricing in these risks.
All of this information informs our investment strategy, which is fluid depending on the forecast that good data helps us make. For the moment, we are continuing to remain invested in value plays in these sectors: energy, financial services, commodities, healthcare, and consumer staples. We’ll also be looking for opportunities to be on the short side of some sectors.
Now that we’ve ‘unwrapped’ all the data, we wish you all a happy and healthy holiday season and look forward to keeping you informed on economic trends in 2023. Cheers!
