Stephanie Link, HighTower: Linking the Data & The State of the Economy
September 10, 2024
Written by Alec Hubbard, CFA
A part of the draw to the CFA Charter is the potential to access some of the premier speakers that the financial services industry has to offer. On September 10, CFA Society St. Louis heard from Stephanie Link at the Saint Louis Club in Clayton.
Link-- Chief Investment Strategist, Head of Investment Solutions and equity portfolio manager for HighTower Advisors-- is known for a wide range of accolades, including her work as a CNBC contributor, her tenure as the CIO of Jim Kramer’s Charitable trust, and her time as Nuveen’s Head of Global Equities where she also managed the $200 billion CREF stock variable annuity. To no surprise, the Saint Louis Club’s conference room was full of analysts, financial advisors and other professionals eager to hear her opinions on the current economic environment.
Stephanie began by asking the question, “How many people believe we’re going to be in a recession this year?” Despite the large attendance, the response was close to unanimous with few (if anyone) raising their hands. Stephanie commented on the stark difference from her presentation last year where a lot of the attendees had indicated they thought we would. She went on to title herself an optimist and highlighted the big surprise of the last year: accelerated growth.
Link indicated that this year, economic growth is beginning to slow. The impacts of financial stimulus have become less pronounced and, after a second revision, the annual GDP was reported to be 3% in the second quarter. The Atlanta Fed, who keeps a running estimate of the present GDP, is measuring around 2.5% for the third quarter. While their indicator is very volatile, anywhere in the data’s current range from 2% to 2.5% would be above the long term trend. Link continued to elaborate on the economic forces at play.
The economic environment last year was juxtaposed by $7 trillion in economic stimulus working against restrictive monetary policy. In the end, people did not adequately account for the stimulus ability to offset and overwhelm monetary policy. Link pointed out that “when 60% of GDP is attributable to stimulus, it’s no wonder we have inflation.” Yet Link contextualized inflation with respect to the consumer.
Link commented that while everyone wants to say the consumer is dying, most consumers are doing well. She described anecdotes around her experiences with hotels, restaurants and airports. The strong consumer is attributable to a strong job market, and where there are no longer 2 jobs available for every person seeking employment, the ratio is still close to one-to-one. As a result, wages have remained pretty good. Link supported her case with data from ADP (a HR Services Company) released just a week prior to the speech indicating a 7.3% bump for switching jobs and a 3.8% increase in average hourly earnings. In addition, while inflation is up 20% from its lows, easing inflation is supporting the consumer. Inflation coming down means interest rates are likely to come down. Link pointed out gasoline prices have decreased 15% which is a key area of relief for many consumers. She emphasized, “75% of the economy is the consumer. They are the most important piece.”
Stephanie also provided commentary on what she titled a manufacturing renaissance. She described how Covid led to a massive reshoring. Manufacturing, broadly, is leaving China, and relocating around the world including the United States. She stated ISM services numbers last week were well in expansion and cited strong factory orders. Emphasizing the importance, Link pointed out that manufacturing is 10% of the economy and for every manufacturing job created, 7 jobs are created around it.
Moving to specifics, Link stated that she isn’t convinced we’ll see 15% earnings growth next year, but that earnings this year were strong, and not just in Nvidia and other technology firms. She exclaimed that many sectors, minus technology, have been ignored by investors and that is where she sees value at this point in time. She stated that the long term S&P 500 return is 7.7%, compared to fixed incomes at 3%, and while it may not be as strong as last year’s 18%, or 26% the year before, she would take it even if we could see some mean reversion. She stated she is a fundamental analyst at heart and she can find good companies on sale. Outside of the stocks named ‘The Magnificent 7’ perhaps, but if the Magnificent 7 pull back, she said “sure, why not?” Link stated that whether the fed cuts rates 25bps or 50bps, it ultimately doesn’t matter. She concluded that the Fed is acting dovish and one should not fight the Fed, and that lowering rates is good for risk assets, which is why we’re seeing the yield curve steepen. Contrast that steepening to last year when the yield curve was inverting and people thought there would be a recession. Link ended by reminding the attendees that the numbers are pretty good in terms of the overall economy.
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“Who’s Gonna Win?”
Dr. Andrew Reeves, Director of the Weidenbaum Center, Professor of Political Science & Author
May 8 Speaker Summary By Alec Hubbard, CFA
Something that can be difficult to remember in 2024 is that the United States finds itself in the midst of a presidential election. Given the potential for federal policy to influence market outcomes, analysts in the financial services industry find themselves stuck with the same question that regularly bothers sports fans and horse bettors alike:
“Who’s gonna win?”
On May 8, 181 days until the U.S. 2024 presidential election, CFA Society St. Louis heard from Director of the Weidenbaum Center, Professor of Political Science and author Andrew Reeves who gave the local analyst community a greater context and understanding of the nuances surrounding the presidential race.
Professor Reeves began by pointing out the historical anomaly that the election presents. For the first time since 1912, when Teddy Roosevelt introduced the country to the short-lived Bull Moose Party to run against President Howard Taft, two men who have held the office of President of the United States will run against each other. Should Donald Trump be the victor, he would be the second president in U.S. history to hold non-consecutive terms.
To explore the data around this unique election, Reeves pointed to 538.com as a consistent source for data. 538.com collects outstanding polling data from different sources around the same questions and creates weighted scores. This group measures each poll with consideration to its methodology and quality to attempt to get a more holistic understanding of public opinion. According to the 538.com data, the race between Trump and Biden is very close, with the men being consistently within a point of each other throughout the year. Reeves reminded the crowd that on election eve in the 2020 election, Biden was leading the polls by 8 points but only outperformed his rival by 4.4 points when the votes were cast. He also pointed out the importance of the states that Biden won in that election which were lost by Hillary Clinton in 2016. They were the story in that election and are positioned to be important in the upcoming one.
A part of the disparity between President Biden’s position in 2020 and his position in today’s election, Reeves surmised, is due to his approval. On the day of the presentation, Biden’s disapproval rating is 17.7 points higher than his approval rating. This represents a historic low. In recent history, only George H.W. Busch was close to being as unpopular as President Biden. The professor speculated that if the election were held with the numbers on May 8, Biden would win 48% of the popular vote which, given the Electoral College landscape, would make victory very difficult. Reeves then discussed what he considered why President Biden is so deeply unpopular: the economy.
While Biden’s first accomplishment listed on whitehouse.gov is “Lowering the Costs of Families’ Everyday Expenses”, Reeves pointed out that Biden’s messaging is pretty incoherent on the subject of inflation. Looking to survey data from Gallop, Reeves pointed out that when people are asked, ‘What are the biggest challenges for U.S. families?’ the prevailing answer, overwhelmingly, is ‘the high cost of living.’ The only other response that comes even close to that is ‘the high cost of housing.’ Pointing to historical responses, Reeves showed a graphic that detailed the same question asked over time, and up until 2020, people citing cost of living concerns hardly ever hit 10%. “Now”, Reeves said, “it’s the thing.” (Inflation itself has come down since the end of the Covid-19 pandemic, but it’s still above pre-pandemic levels). That caused the presentation to transition to the president’s relationship with the economy.
Professor Reeves pointed out that from 1960 to 2000, a consistent trend was that when people felt better about the economy, they felt better about the president. During the Obama administration that relationship all but vanished, and it remained broken during the Trump administration. While Biden may not appreciate it, he seems to have restored the traditional relationship of economic sentiment and presidential approval. Though curious enough, the same restoration has not been made to consumer sentiment. Through Biden’s administration, when consumer sentiment increases, Biden’s approval rating have tended to decrease. Reeves asked the audience “Why isn’t Biden getting credit?” and presented 4 possibilities to answer.
First, it may be that partisanship in the United States is so strong that the objective economy matters little. Second, the messaging by the campaign could be poor and the media’s attention tends to prefer public events, like Trump’s court appearances, to expounding on economic data (to the distress of some in the room, Reeves reminded us that the average voter isn’t actively checking in on Federal Reserve data). He also suggested, third, that it could just take time for voters to adjust to new economic realities. Fourth, and finally, Reeves suggested that the disconnect between the economy and presidential approval could be a result of uncertainty about the future overwhelming present circumstances.
Reeves concluded that we are still a long way away from the 2024 election, and regardless of how one feels about the current election, we could be seeing the end of a political era. Whether the current era started with Obama, or Trump’s first term, is something Reeves admitted to being uncertain about, but the shadow of Covid-19, the historically old age of the political candidates, Donald Trump’s changes to the Republican party and Trump’s potential victory, all give some certainty that the next four years of politics-- whether Trump or Biden emerge victorious this year--will not be the same as the last four.
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When Narratives are Wrong
CFA Forecast Dinner 2024
January 24th 2024
Written by Alec Hubbard, CFA
Every year, one of the cornerstone events to any local CFA society is the annual forecast dinner. These tent-pole events gather a wide variety of local investment professionals to hear about what myths drive the markets and how reality may contrast with those ideas. On January 24th 2024, CFA Society St. Louis held its annual forecast dinner at the Hilton Inn in Frontenac MO. The keynote speaker was Rob Arnott. Arnott is the founder and chairman of Research Affiliates, a subadvisor of PIMCO Investment Management. The lead portfolio manager on 13 strategies, Arnott is well known in the CFA community for his broad investment management and his renowned research on smart beta and value investing. His expertise has lead Arnott to be a familiar name in academic literature, with more than 130 articles in distinguished journals such as the Journal of Portfolio Management, the Harvard Business Review, and the Financial Analyst Journal. Arnott’s forecast was especially unique as he served as CFA Society’s 2020 keynote speaker which allowed many attendees to contrast his comments in the present day to the ones he made before COVID 19 changed the world as we know it.
Rob opened with discussing how we exist in a distinct paradigm shift which he compared to the dawn of the internet. Painting a picture of how anyone in the 90s would be amazed with the potency of the technology we have (and perhaps the more mundane things we use it for), Arnott asserted that we exist in the type of environment where the disruptors of the past are prone to be disrupted themselves through artificial intelligence (AI). Although Markets are conventionally thought of as efficient, Arnott painted a more nuanced picture stating “The good news is that the market is driven by narratives, and if the narratives are wrong there is opportunity for profit”.
Arnott went on to discuss a large fallacy that has existed in the past and perhaps persist today, the idea that the big winners of today will continue to win in the future. Diving into historical data, Rob showed how the biggest names in the market are consistently changing. For example, the largest 10 stocks in the 1990s have all been surpassed by more modern names and even 4 of the top names from 2020 have lost their footing. That historical context stands in contrast to 2023 where the “Magnificent 7” (Nvidia, Meta Platforms, Apple, Amazon.com, Microsoft, and Alphabet) have grown to command 27.9% of the S&P 500 Index, and have a larger market cap together than the even large national economies like that of China. Arnott stated that deeming these 7 companies more important to the global economy than China and perhaps all of Europe is, at the very least, incredibly bold.
Drawing a line between past and present, Arnott reminded those in attendance that AI is not new. With neural networks dating back to the 1980s, the substantial thing that has changed is that AI is now user friendly. The impact, Arnott suggested, is that jobs won’t be lost to AI directly, but to people who know how to better utilize AI than their peers. A further impact is that, when the impact of AI is realized by the market, the beneficiaries may not be the companies that the market expects.
Transitioning to his academic interests, Arnott discussed value equities. He asserted that value is not dead. He pointed to value stocks being relatively cheap, elaborating on to historical data showing that it is at its cheapest level since 2006. Further exploring the point, he showed data indicating that value stocks were especially cheap when considering the fundamentals of the constituent holdings. Because of these depressed valuations, Arnott was able to use historical data to demonstrate the potential for higher subsequent returns. He also made note of a historical trend of value stocks outperforming during periods of high inflation. This is warranted because high inflation demands a higher discount rate which challenges investor preferences, shifting those preferences from the more speculative future returns of growth stocks towards current income that makes up a larger proportion of value stock returns. This impact on preferences is supercharged because higher inflation rates tend to be more volatile than lower inflation rates causing people to prefer the margin of safety that stronger fundamentals relative to price can provide. With two historical tailwinds for value stocks are in play, Arnott made a compelling case for the consideration of value positions.
Finally, Arnott discussed interesting work he has done in the study of fundamental indexing as opposed to capitalization (cap) weighted indexes that dominate the market. Arnott specified that while he isn’t disinterested in cap weighted indexes, his approach to research and development is asking whether there is something that can lead people to better outcomes. He then declared that he believes the final myth swaying the market is that cap weighted indexes can’t be improved upon. Because the market is dominated by top performers and because the market has a spotty record of identifying top performers in advance, there, in theory, should be room to improve. Arnott closed by sharing work he has done on the RAFI Fundamental Index and its development of the indexing field.
A special thanks to the 2024 sponsors of the Annual Forecast Dinner. The silver sponsors were PIMCO Investment Management and Janus Henderson Investors. The Bronze Investors were Palmer Square Capital Management, Voya Investment Management, and Allspring Global Investments.
FEDERAL RESERVE: 2024 U.S. ECONOMIC
& MONETARY POLICY
January 4, 2024
By Alec Hubbard, CFA
A part of CFA Institute’s mission is to disseminate knowledge to improve investment professionals’ ability to contribute to robust markets. Every year, a part of CFA Society St. Louis’ effort to contribute towards this goal is bringing the local investment community together with thought leaders from St. Louis Federal Reserve. On January 4 at the Saint Louis Club, CFA Society St. Louis-- in partnership with the Financial Planning Association® of Greater St. Louis and St. Louis Women In Investments Network-- heard from Kathleen Navin on the state of the economy.
Navin is a Senior Business Economist at the Federal Reserve Bank of St. Louis in the division of Supervision. Kathleen’s responsibilities include analyzing and presenting on economic and banking conditions in the United States (and regionally). Prior to her role with the St. Louis Federal Reserve, she held the position of Economics Executive Director in U.S. Economics at S&P Global Market Intelligence where she produced analysis on economic data and forecasts related to the US economic outlook.
Her recap of 2023 highlighted the Federal Reserve’s restrictive stance to monetary policy and 2023’s economic conditions surprising market participants with better than expected performance. Navin pointed out that this positive outcome was largely driven by the consumer who still had excess savings that had built up during the COVID-19 Pandemic.
Transitioning to the present, Navin pointed out that excess savings have been drawn down and the labor market is weakening. Higher interest rates are impacting housing considerably and inflation is continuing to moderate. Economic growth is expected to slow in 2024 with a projected unemployment rate of 4.1% and inflation continuing to move closer to the Federal Reserve’s 2% target. Navin then used data from FRED, a publically available economic data database maintained by the Federal Reserve Bank of St. Louis, to illustrate her ideas and things to watch for. Some points Navin pointed out were:
On the consumer
§ Consumer excess savings has drawn down to $300 billion from $2.2 Trillion at its peak, weakening its potential to support the economy
§ Credit card balances have increased to pre-pandemic levels. As consumers try to maintain their standard of living in the face of inflation, they have taken on more debt.
On Housing
§ Home prices have stayed elevated in spite of higher rates because of a lack of supply which remains at all-time lows (since 2000)
§ New single family home construction has increased, demonstrated by new permits. Multi-Family unit permits are cooling while single family unit permits continue to increase.
On inflation
§ Navin made a note to pay attention to core services PCE inflation which hasn’t moderated to the extent of core goods inflation.
§ Payroll gains have been slowing to 230,000 a month in 2023 from a 600,000 per month high in 2022. Navin made the note that the phenomenon known as The Great Resignation, where people changed employers for substantial salary increases, has largely normalized. Less turnover in the labor market is helping to moderate inflation.
On Rates
§ Long term treasury rates have fallen and retraced increases experienced from July to mid-October.
On Equities
§ The U.S. Dollar has depreciated 4% since October, making exports cheaper and imports more expensive. This resulted in a positive impact on GDP.
On Banking
§ The big story is a decline in bank deposits. This largely happened at regional banks because customers were less confident about their stability.
§ Banks’ willingness to lend tapered, which is something to keep an eye on because bank loans are how interest rates are disseminated on the real economy.
Finally, discussing her projections, Navin predicted a 1.4% GDP representing a moderated number compared to 2023, but one which ultimately should avoid a recession. On inflation Navin showed projections that model it continuing to trend towards its 2% policy target with 2026 being shown as the year it may completely normalize. In terms of rates, Navin described what she called a “removal of policy” wherein 3 rate cuts could happen in 2024, but with the justification of removing restrictive policy as opposed to endorsing exuberance. As always, the Federal Reserve will follow the data to see if the economy starts to reheat or if it will continue trending towards a sustainable outcome.
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