Issue 4 / February 8th
By Noah Bohman | The Risk Report
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Happy February everybody, in this issue we are taking a good look back at the month of January. Last month had some great news for the economy and the market and right after we take a look at the highlights, we will jump into the risk associated to the economy and markets moving forward, so lets discover the economic highs and potential risks ahead. First, the Federal Reserve and their outlook on the economy is looking good and the case for a soft landing is still very possible. GDP came in for the United States fourth-quarter release, GDP is the broadest measure of economic output. It rose at a seasonally and inflation-adjusted annualized rate of 3.3% from October 2023 through December 2023. The Commerce Department reported Thursday and it was higher then the initial estimate which is good news. From January through December of last year GDP registered a robust 2.5% rate.
Some more good news for the economy is that a year ago most economists expected a recession, now 91% say otherwise. If these number are indicating anything it speaks to the fact that more economists are calculating that if the economy stays in good health for the duration of the rate cycle they believe the Federal Reserve will eventually lower interest rates and move the economy back into a strong growth phase with out stalling the economy. Obviously, that is the best case scenario and with a strong still growing economy that makes sense, the deciding factor is to see if the economy can stay strong with interest rates elevated for a unknown duration as we wait for the Fed to trust the data and move rates lower.
Okay to wrap up the good news inflation has cooled, consumer sentiment jumped in January and the labor market remains robust. The PCE Price Index offered the latest read on the Fed's preferred inflation gauge which came in at below 3% for the first time in 3 years. On the flip side of that consumer spending was high in November and December which put pressure on prices in the consumer market. That move will put pressure on the Fed’s decision when it comes to moving rates lower. With the consumer staying strong through the holiday season this could delay the Feds decision to start easing rates as supply and demand has not caught back up. With the PCE price coming in and dropping over the last three months this does start to create a case for the Fed to start lowering rates in the short term. The more readings the Fed gets with inflation and the economy moving towards their target the more the support will build for rates to come down and vise-versa. Lastly, Consumer Sentiment Surges Higher Again as Inflation fears fade, the Michigan Consumer Sentiment Index jumped to 78.8 in January, surging 13% from the previous month as consumer inflation expectations fell to their lowest levels since 2020. Let’s also sneak in the AI rally that pushed stocks higher on the back end of January, this boom led stocks to new all-time highs as investors cheered on AI based driven momentum.
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There are so many good indicators for the economy for the start of Q1 2024, but lets take a look at the risk that is associated moving forward. Commercial real estate has been getting attention again and its position in the current remote work economy is only getting tougher, currently vacancies are at roughly 18% in the United States, before the pandemic began vacancies were at roughly at 12%. Prices for commercial real estate are down 11% since the Federal Reserve started raising interest rates and with the potential slowing of the economy, it does not put commercial real estate in a great position. Companies around the United States are not making employees come back to work, and employees are not making a push to come back into the office either as telework has proven to be a successful means for companies operations. Since the end of the pandemic this issue has deepened and the longer time goes on the more debt commercial real estate companies are taking, so the big question is what will happen with the commercial real estate industry and corporations that own massive amounts of office buildings?
There have been reports of companies that are looking to sell properties that they own, because the space is in less use. They are consolidating there offices and creating mixed use spaces for the employees if they come into the office. Other companies are selling properties at a loss and when the company realizes that as a loss on their balance sheets that will hurt corporate profits. Mall's around the United States show more of the commercial real estate crisis, with high vacancy rates due to online shopping. An estimated $1.2 trillion in debt is set to mature within the next two years and a decent amount of that debt is held by national and regional banks. The risk to regional banks is roughly 4x higher than national banks, as the regional banks hold more commercial real estate assets than national banks. The risk associated with owning commercial real estate is only strengthening and as time goes on, commercial real estate companies will need to find a way to strengthen the sector and create more revenue to avoid missed payments on their current debt obligations.
As we move out of January layoff are still front and center in the news. Tech companies laid off more then 20,000 jobs in the month of January while the NASDAQ is up 7.30% for the month as of February 5th. Meanwhile, companies have still been downsizing and this could be due to a few issues. One reason is weaker forecasts are forcing companies to cut jobs now so it will not hurt the bottom line down the road if profits shrink. Another reason is inflation, job pay has been rising consistently on the backend of the pandemic to keep workers happy and to make sure salaries stay at pace with inflation. Now, companies are cutting back on spending but still faced with raising wages and this could cause companies to cut hiring to secure the talent they do have. Lastly, companies have stated that they need to run more lean, make decisions quicker or are moving to transfer there strategy into AI and needed to allocate capital to do it. Either way you put it citizens are losing there jobs while stocks are reaching new all time highs while investors are cheering the actions. Companies forecasts are weakening, and maybe the stock market is a false signal for where the economy is and where the economy is going and the layoff are an early indicator of that. 3M Tesla and ATT were just a few of some of the big names that gave softer outlooks in their Q4 results.
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In this type of economic activity one must think, why even with quantitative tightening the economy still runs strong. Could it be that the federal reserve has brought interest rate up at the right pace and to the right amount to slowly curb inflation while not stalling out GDP and economic activity. It will be a true test for the federal reserve because there is still possibly a long way to go and many risk factors still associated to the economy. Corporations have stayed resilient durning the quantitate tightening, there has not been much of a slowdown in spending which is peculiar when money is more expensive to barrow. This could be showing us that with strong consumers, corporations and businesses can weather QT when inflation needs to be tamed. We will see if this is the case, with the Fed planning on keep rates higher for longer, corporate outlooks showing weaker forecasts, corporate spending could slow down and simultaneously weaken the consumer as well. Employees are still getting laid off as well which does not put many Americans in a good place especially with consumer debt at high levels. We saw discover card increase its balance to maintain risk against potential delinquencies. They added $1 billion dollars to their reserve and that now sits at $1.9 billion up from their 2022 reserve numbers.
All in all, the readings from Q4 2023 were very strong and the economy looks to be in a good position moving into 2024. As we take a look forward into Q1 the true test will be corporations and the consumer. Through all of 2023 a strong consumer and a robust economy have pulled in the opposite direction of interest rates and have shown us a way to a potential soft landing. This was a big part of the momentum that lifted stocks higher through 2023. With interest rates above 5% for four months now it will be key to see how the consumer and economy fair moving onto 2024. Consumer debt is raising and we will have to see how strong the consumer can stay after the economic stimulus levels get lower and are possibly gone for some families. So watch for consumer spending and corporations lowering forecasts and continuing layoffs as signs of a weakening economy. If the economy does weaken that does put us in the way of a recession but it also allows the fed to lower interest rates and spur growth. Keep yourself risk advised and subscribe to the risk report for updates on new blog postings and visit TheRiskReport.org to view the full economic Risk Report to see all the economic associated risk.
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