Ep. 257 – 2024 1st Quarter Economic Update for Retirement

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In this Episode of the Secure Your Retirement Podcast, Radon and Murs speak with Andrew Opdyke about a 2024 1st quarter economic update and the expected economic changes in the second quarter. Andrew is a Certified Financial Advisor and Economist at First Trust Advisor.

Listen in to learn how the current concentration performance and the 2024 elections will impact the market volatility and economy, respectively. You will also learn about things that are bringing inflation down and why we’ll still see a relatively shallow recession this year.

In this episode, find out:

●     The unexpected events that risk increasing inflation in the second half of 2024.

●     Understanding the fight between strengthening the economy and keeping the pressure on inflation.

●     The possible impact of the current concentration performance on the market volatility.

●     How the 2024 elections will impact the economy and why you shouldn’t make investment changes based on the outcome.

●     Things bringing inflation down and why we’ll still see a relatively shallow recession.

●     The 2nd quarter concerns – quitting the inflation rates too soon and the huge spending numbers.

●     The 2024 Excitement – the broadening out of companies and the longer-term reward of it.

Tweetable Quotes:

●     “Some of the things that are bringing inflation down are because of some deterioration we’re seeing from pockets of the economy.”– Andrew Opdyke

●     “Based on history, you have virtually never benefited from making significant investment changes based on the party that’s in power.”– Andrew Opdyke

Get in Touch with Andrew:

●     LinkedIn: https://www.linkedin.com/in/andrewopdyke/

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil:	Welcome everyone to Secure Your Retirement Podcast. We are excited today. About every three or four months we get to have the privilege of having Andrew Opdyke come back on as our, we like to claim you as our economist. But definitely being able to have this relationship where you’re able to come on and give us big picture around the economy is always important. So thank you very much, Andrew for coming on and chatting with us today.
Andrew Opdyke:	Oh yeah, absolutely. I love these conversations.
Radon Stancil:	Excellent. So last time we talked to you was in December of 2023. We all know 2023 closed out to be a pretty decent year at the end of the day. I mean, it kind of had its problems and its challenges throughout the year, and here we are now. We’re recording this particular conversation on April 1st, 2024, and we’ve started off the year, not too bad. I mean, the year’s kind of started out. I mean, when you look at it, not too bad, although there is a lot of conversations going on about a lot of what ifs. And so we kind of want to get your perspective, kind of give us what you think, what you’ve seen so far for 2024 and kind where we are right now and maybe some of the things that you’re seeing from your perspective.
Andrew Opdyke:	Yeah, absolutely. Well, it’s kind of crazy to think that we’re already almost … We are a quarter of the way here through 2024. There’s been some strong data, there’s been some weak data. I think the biggest thing that’s surprised people so far through the first quarter of the year is that the Fed’s expectations where inflation would be, when they would be starting the rate cut process, that by the end of last year, I think we all kind of knew hikes were probably behind us. But last time we talked in December, the markets were pricing in that the Fed was going to cut six times this year for about a percent and a half. That’s now really changed. They’re looking at two, three cuts this year, and it’s because that data has been stronger, which is positive from the development standpoint of the economy keeps growing, but it’s a headwind to the Fed saying, “We want to get inflation down to 2%.”
	In fact, just last week we had data out, it’s the most important data release, personal consumption expenditure, PCE prices, and it actually ticked higher on a year ago basis from the prior month. And if you looked at taking out food and energy, the very volatile components, that number is close to 3%, the Fed’s new number. A year or two ago, they said, “Hey, we’ve got a new metric that we’re going to focus on, which is services excluding housing.” Because remember we had that big goods inflation during COVID. The lumber was in short supply, semiconductors were in short supply. They said, let’s focus on the rest of the economy. That number is still over 3%. So the Fed is sitting here, and they had a meeting a week and a half ago saying, “We don’t yet have the confidence that we’re ready to move. We don’t yet have the confidence that inflation is going to sustain down to 2%.” And some of that is the things that nobody would’ve expected.
	When you get things back in 2022, we had Russia invade Ukraine. That kind of threw things for a loop, pushed up prices. More recently we’ve had the Red Sea and the conflicts there, which is rerouting ships down below Africa as about a million dollars in fuel costs for that round trip. Just last week, we had the boat that collided with the Francis Scott Key Bridge in Baltimore. These are unexpected events that risk increasing inflation because transport might be more expensive, getting things may be more difficult. So I think the story here in the second quarter of the year is going to be very much focused on do we see improvement in these numbers or do they stay roughly the same? Because if they stay roughly the same, if inflation kind of remains flat at this point at an elevated level, the Fed may have to move even later than what the market’s pricing in. But we’re growing, consumers have the money to spend, consumers continue to spend. It’s this fight going on between strengthening the economy and not keeping the pressure on inflation. Time will tell how that ultimately plays out.
Murs Tariq:	Awesome. It’s always interesting to hear your perspective on things like this, Andrew. So the markets, if you go back to Q4 of 2023, just ripping and roaring, and then the beginning first quarter here of 2024, markets are up. And some of that I think is related to AI and some of your bigger, like Nvidia and some of those stocks and the bandwagoning around those. But with the idea of walking into the year with six potential rate cuts and now we’re down to two to three, you would think that the market would’ve reacted somewhat a little bit negatively towards hearing that Fed speak. And for the day or two it did, but for the most part, it still trended upwards. So what’s going on there?
Andrew Opdyke:	Yeah, I mean, it’s kind of a continuation of last year. I mean, if you had told somebody at the beginning of 2023, beginning of last year, “Hey, this year, rates are going to go up because the Fed’s going to keep hiking and profits, earnings on the S&P 500 are going to be flat to slightly down.” I don’t think there’s too many people out there that would’ve said, “Oh, market’s going to be up 24% this year.” But that’s what we saw. And a lot of it was concentrated performance. Really what we saw was people willing to pay more for the companies, PEs expanded. And so there’s kind of been this disconnect here between the logic, how you would expect things to progress and how they have been progressing. I’ll admit that makes us a little bit nervous because when things get extended based on emotion, based on hopes or expectations, not based on performance or what we’re actually seeing in the day to day, we’ve been through this before, we’ve been through these periods where a handful of companies get heavy concentration.
	Right now, top 10% of the market companies represent about 75% of the market’s market cap. It’s about the highest we’ve seen it going back 100 years. It is still quite condensed, quite concentrated. Now what’s interesting is you go down on size, you go to some of the lesser known companies, some of the more mom and … I shouldn’t say mom and pop shop, but more general companies, they’re still trading at relatively historically normal levels. It’s just you’ve got that pocket pushing the market. And the question is, if everybody’s running in one direction and anything causes that to shift, if everybody has to run for the exit at once, there could be increased volatility. So there’s hope there. And I’ll be honest, I like artificial intelligence. I like the idea of what it can do. My family is … Both of my brothers and my dad are computer programmers.
	The interesting thing from an economic standpoint is we haven’t really seen the output yet. We haven’t seen a notable growth in productivity. We haven’t really seen strong profit generation coming from that. Right now, it’s very much expectation. So the market moving on expectations, the market moving in a direction that’s counterintuitive, should always make you pause a little bit and say, “Are we chasing something? Or do we have a legitimate, reasonable, math-based reason for believing that this could continue?” And that’s hard to justify right now.
Radon Stancil:	So prior to us actually starting the conversation, you mentioned something, I’m just going to bring it up. We don’t need to spend a lot of time on it. Murs and I did a whole podcast here recently, and the whole concept of the podcast was do elections really affect things, regardless of who is elected? And we kind of went through that. But what we pretty much could say we’re setting ourselves up for is a year of a lot of negative conversations. Probably a battle, probably a lot of lawsuits, probably a lot of mess. And so could you just speak from your perspective economically speaking on an election in general, and obviously last time we went through an election for presidential election it was difficult from a pure who’s going to give in and who really is the president? Probably going to see all that again this year.
	So how do you see it from an economic standpoint? The reason why I’m bringing this up is while it may or may not, and you can answer the question, people’s perception, it unnerves them, it unnerves them to have that. So can you just speak a little bit about that?
Andrew Opdyke:	Yeah, I mean, this is something we have to talk about every two years of midterm elections or four years with that. So every two years we’re talking about politics in some shape or form. Presidential elections, everything gets intensified and it’s a frustrating thing as an economist because we spend a lot of time in the data. I love to look at history and say, “Let’s look at market performance, economic performance during presidential changes. Let’s look at it under Democrats. Let’s look at it under Republicans.” And what you notice is that it’s relatively consistent, except when there’s some major economic event. We always get this emotion that comes to it. And people, as I crisscross the country, are like, “Yeah, it feels like elevation of emotions this year.” It looks like, have this repeat fight between Biden and Trump. And some people are like, “Oh, if that guy wins, I’m going to move to Canada.” And the other guy’s like, “No, no, no. If your person wins, I’m moving to Canada.” Well go visit Toronto. I was there not that long ago. There’s not that many Americans up there.
	So this is something that we consistently see happen, but we also know, we know deep in our hearts that when the election results come out, roughly half the country’s going to be upset, roughly half the country’s going to be happy, and then everybody’s going to go back to work, and Apple’s going to build another iPhone regardless of who wins the election. Amazon’s going to put another distribution facility closer to your home. And what the data tells us is we spend mental energy, we spend emotional energy really focused on these topics. But at the end of the day, it’s so much more about what we do, it’s so much more about the entrepreneurs, the innovators, the workers, and what they do in terms of progressing things forward.
	Usually what we see is some volatility leading up to it simply because there’s uncertainty. When the election results get passed, we tend to see the markets rise because if nothing else, there’s more certainty in terms of the direction that policy is going to go. It frees up companies to make some decisions on investment. So I think as we approach the later parts of this year, if we see economic weakness, that’s going to be more impactful. I would say based on history, you have virtually never benefited from making significant investment changes based on the party that’s in power. It has not been a good indicator of what direction the market’s going to move, what specific sectors are going to perform necessarily all that much better. And yet we let it take a ton of our time.
Murs Tariq:	Yeah, that was pretty much our stance is that there will be short-term issues just because of what was said the night before and what headlines got chosen to be the top of the media and everything like that. But the longer term, it doesn’t really have a massive impact on just purely data-wise. With rate cuts on the horizon, I think the idea of layoffs, I think has been going under the radar, but they’re still happening. Layoffs are things that the Fed does want to see to a degree. So I guess what I’m getting to is what is your company’s stance at this point with how strong the economy has been, with how good employment has been as far as potentially still walking into a recession or what was it? Soft landing, no landing, all these different potential outcomes. Where do you think you guys stand on?
Andrew Opdyke:	Yeah, I mean, so I’m still in the soft landing in terms of, I still think that we could see a recession. It’s not a particularly deep recession. It’s an interesting one because in GDP we got fourth quarter GDP numbers for 2023, the US economy grew by just over 3%. Now, when you break down those numbers and say, “Where did activity come from?” One of the major contributors to activity last year is that we ran a $1.8 trillion deficit. The IMF, International Monetary Fund. Estimates that government purchases last year was roughly 2% of that growth, two-thirds of the growth coming from government, which is not … That’s not where you’d want it to be coming from over time. It’s not typically a sustainable form. We cannot continue to run $1.8 trillion deficits. And when you start diving into the data, you see some interesting stuff. Employment is a great example.
	Last year, employment averaged about 250,000 jobs per month, which in order to keep the unemployment rate relatively flat, you needed it at about 170, 175, 175,000 per month. Last year, activity was led by two sectors, government and healthcare, which is the largest government subsidized sector. They were roughly half of job gains. Again, in normal times, they’re 17, 18%. It was an outsized impact even in areas like employment where you’ve got this government influence, the spending influence, and then you start diving into a lot of these things and you notice one of the biggest issues that the Fed has to see overcome in order for them to start cutting is we’ve got to get some healing in terms of where the workers are. We saw a massive shift from the service sector down to the goods sector in 2020 into 2021 because that’s all we could get. We have not seen that real transition back.
	I just came back from one of my toughest trips of the year. I got to go to Hawaii once or twice a year, spent some time in Oahu, but it was really interesting because I came from there a week or two after being in Columbus, Ohio. And in Columbus, Ohio, you’ve got a $20 billion facility going in because of the CHIPS Act, Inflation Reduction Act. You’ve got manufacturing companies whose orders have been relatively flat activity, relatively flat, but they’re not willing to let go of workers right now because they have projects that are going to be coming online.
	On the flip side, you’ve got places like Hawaii where tourism fell 75.5% in 2020. They’re still in the process of getting back, and they’re like, “Yeah, the hotels, the restaurants.” They are just getting back in terms of workers. So there’s still a mismatch in terms of where people are, and that’s kind of this thing where it’s steadily improving, mainly because small and mid-sized businesses are saying, “It’s gotten too expensive for us. Our rental costs are up. Our inventory costs are up. Our costs of hiring have gone up. Our borrowing costs.” You go back 4 years ago, they were borrowing for 3, 4, 5 years at 4, 4.5%. Now it’s closer to nine.
	So some of the things that are helping the ease the Fed’s path, some of the things that are bringing inflation down is because of some weakness, some deterioration that we’re seeing from pockets of the economy. And if you strip out that government side, and if you stop and think about this, does it make sense that we run the largest deficit as a percent of GDP we’ve ever seen outside of a global war or deep recession? Does it make sense that we spend $1.8 trillion when last year we grew 3% and we had an unemployment rate below 4%? It’s really hard to justify doing that type of activity, but here we stand and we’re expected to see 1.6, 1.7 trillion this year.
	So government’s supporting, government’s keeping it up. The companies are reacting and saying, “Hey, we’re going to make some adjustments.” Tech sector has done some layoffs. We’ve seen some companies guiding towards the lower end of CapEx spend. They’re not going to build as many factories, put in as many projects. So it’s this balance. If government’s propping it up, the other side is weakening. And if government has to step back or if they don’t grow, because remember, if they spent 1.8 trillion in deficit last year and they run a large deficit but not as large, they turn into a headwind for GDP instead of a tailwind. I think you’re going to see moderation on that side and more of what we’re seeing in the private sector will flow through.
	Now, does that mean these tech companies won’t continue to grow? I mean, there’s major investment. There’s a lot of spending in there. So you’ll see pockets of strength within some of that weakness. I still think recession is deemed by the NBER, National Bureau of Economic Research. I still think they will say we had one this year because manufacturing has moderated, retail sales inflation adjusted has been down year over year. If we see weakening unemployment and the unemployment rise, let’s say above 4%, I think they may very well say, “Yes, we had it. It wasn’t deep, but it was officially a recession.”
Radon Stancil:	Excellent. So we like to always end these conversations positive. So I’m going to go with the negative. I’ll let Murs go with the positive. So here we sit, beginning of the second quarter of 2024. So could you lay out for us, from your perspective, what are you concerned about? Give us your top whatever, 1, 2, 3 concerns that says we’ve got to get through this year and this could be our problems.
Andrew Opdyke:	Yeah. I think one of the biggest problems we could have is if the Fed does what people want it to do, if the Fed does what markets want it to do. When the Fed did their press conference, everybody’s asking them, “Why can’t you just start now? Go ahead, start.” And you turn on the TV and they’re like, “Look, consumer debt’s at all time record highs. We can dive in all deep in there.” Consumers are actually fine, but they’re trying to make all these arguments and the politicians are making arguments. They’re sending letters to the Fed saying, “Hey, start cutting rates, start making it more attractive for companies to do business.” If the Fed starts cutting now before inflation is in check, if they cut too aggressively, the big risk we have is inflation re-accelerating. It would be a complete travesty if we quit this fight, the inflation fight too soon, and we had to restart it again in 6 months, 9 months, 12 months. That, I think is one of the biggest risks, taking very short-term gain and creating longer-term pain.
	The other issue I look at that I’m frustrated with are these spending numbers. I look at it, the Fed last year lost about $140 billion because they pay the banks to hold onto the excess money that they gave them a year, two, three years. They spent over $200 billion given to the banks just to hold the money that the Fed gave them a year, 2, 3 years ago. I think we need to get some of these things in check. I think we really need to say, “Hey, some things got dislocated during COVID, and even a little bit before that. We need to reevaluate and say what’s sustainable? What promotes growth over time? And we need to make some of those adjustments.”
	And so far, I haven’t seen in an election year, politicians don’t like to cut. In an election year, they want to see the fastest growth they can, so they can say, “Look what I did.” They want to get that. They want the party right now, and I just think that short-term outlook, that short-term view is a risk that if we don’t address it sooner, it’s going to cause things to happen more pain longer.
Murs Tariq:	Gotcha. So outside of the election, what are you most excited about for 2024?
Andrew Opdyke:	Yeah, so we are starting to see some broadening out. So last year, if you look at the profits numbers, one of the things you’ll see is the earnings for the Big 7 companies were up, let’s say roughly, I think about 24%, 24, 25% earnings among the top 7 companies. The rest of the 493 saw their earnings decline 5 to 6%. So last year, when people say, “Oh, those companies majorly outperformed the Magnificent Seven,” you could justify and say, “Yeah, okay. That’s because of how much they were outperforming on earnings.” This year, we’re seeing that broadening, we’re seeing the earnings broadening out. We’re starting to see earnings growth coming from some of those smaller and mid-sized companies. Remember, everything that companies have had to do to adapt. They adapt to changes in supply chains. They adapt to the regulations, they adapt to interest rates. We take the learning from times of difficulty. They take the learning … If they’ve been forced to when they couldn’t get the workers back, what do you do? Well, you find ways to become more productive. You find ways to be more efficient.
	If the Fed does their job, if the Fed holds rates and we get inflation down and they can start cutting in 2025, we are putting these companies in a pretty good position. I think a lot of them are better companies today than they were 2, 3, 4 years ago with better technology, AI coming into vogue, starting to get hopefully a little bit of traction. But we have the strength in these broadened out companies to see a more sustained push from the market, even if these top six, seven companies don’t have the same level of charge. So I think that is a positive development, not fully reflected yet in some of the market movements, but it’s focused in their data. And the market will realize that eventually. And I think that doing some of that broadening out right now will ultimately be rewarded.
	And again, we sit here and over the last few weeks, I’ve been in very different parts of the country, whether we’re talking Ohio, Hawaii, I’ve been in North Dakota, Minnesota, New York, New Jersey. You see the resilience. Everybody’s fighting, everybody’s working, and everybody’s fed up with what’s going on in Washington. I have seen this kind of emotion, this kind of mentality from people like, “Look, we just went through something tough. We beat it. We got through COVID. We’re off on the other side. Now let’s go, let’s go, let’s go and let’s build upon what we’ve got.” And so I think that resilience too is going to show here in the next few years.
	We live in an incredible place. When you stop and think about it, we are sitting here in the United States, the most productive nation on the face of this earth, the world’s technology leader, the epicenter of math and science, English being the international language of math and science. We are very well positioned if we can get these things in check to continue to be the global leader in growth. And I think we will. We’ve just got to make sure that Washington doesn’t derail us.
Radon Stancil:	Anything else Murs?
Murs Tariq:	No, I think that was very good. Andrew, as always, thank you for your time. Thanks for hanging out with us and talking in a way that a lot of people can understand. Sometimes economics unfortunately can just be over a lot of people’s heads, but the way you talk, it is actually enjoyable to listen. So thank you.