Pillow Talk (singaporean Tv Series)

[Hollie Kipps]

Goodmorning, everybody. Welcome to the 2024 Eye on the Market Outlook Podcast, which is entitled Pillow Talk. Some of you may remember that Pillow Talk was the name of a movie from the 1950s with Doris Day and Rock Hudson. If you haven't seen it, there was a Rock Hudson documentary that came out last year that's worth seeing.

Anyway, pillow talk here refers to the picture I have, with a bunch of bears falling into some pillows, which is a metaphor for the increasing talk about soft landing from a hard landing and from a bear market to a non-bear market. And a lot of that talk accelerated at the end of the year when the Fed signaled that they would, in fact, be easing monetary policy in 2024, some of which was predicted, but not quite as much as what's predicted right now, after some of those Fed announcements.

So I want to walk you through some of the topics that we covered in the outlook, some of which we'll discuss on the podcast today and some of which we'll discuss on a couple of podcasts being rolled out over the next couple of weeks. So what are the topics? Let's say we cover some really important leading indicators, which I think had a large role to play in the Fed changing its tune, the uninflation monitor that also is tied into the same thing.

We take a look at equity markets in the US and the issue around the mega-cap stocks which continue to dominate markets, an antitrust monitor which we'll discuss in this week's podcast, the latest on Europe and Japan, which are going in opposite directions, at least from the perspective of equity investors, a global fixed-income monitor, some additional comments on US federal debt sustainability, information on the US consumer, a section on China, and then we have a deep dive on weight-loss drugs.

I've been working on this for a little bit. And I thought it was interesting to include it here in the outlook instead of having it on a standalone basis. Maybe we'll issue it on a standalone basis later in the year. And then in honor of Byron Wien, who passed away last year at the age of 90, Byron used to publish a top-10 surprise list every year. In his honor, I'm going to do one this year as well.

So let's get into the details here. The first chart we have in the outlook is by far the messiest chart I have ever created. But it's worth it. I promise, it's worth it because what it shows is the seven post-war recessions that took place and the sequencing of when things hit bottom, whether they were the equity markets or payrolls or housing starts, default rates, the ISM surveys, GDP. And what you can see here is that with the exception of the.dot.com cycle in 2001, equities bottomed way before the worst readings on the other stuff.

So obviously, everybody's recession forecast-- or most recession forecasts for 2024 are going down with the Fed, easing. But even if there is a recession, I think the important point is that equities tend to bottom way before a lot of the other economic and market data that people tend to focus on, which I think is really important to understand as we head into the next year.

Now there are 20-- or at least 22 different leading indicators that we follow on a weekly basis. I just wanted to share two of them that are sending a consistent signal, which is that the coincident indicator, which tells you what's happening right now, looks fine. But the leading indicators look weak. They don't look catastrophically weak. They don't look as weak as they looked in 2020, during COVID.

They don't look as weak as what they did during the 1970s. And they certainly don't look as weak as they did in 2008-2009. But they look like-- they're signaling a run of the mill decline in US economic activity which is consistent with a recession.

And then there's another model that we tend to look at, that looks at a few different variables. And then we extrapolate it out for 18 months. And it does suggest that there will be decline in corporate profits this year. And so both of those models are pointing to modest weakness, maybe a very modest recession. Other leading indicators we look at, particularly some that we like a lot, which is the relationship between manufacturing new orders and inventories, is actually getting better on the margin.

So the big picture here is, it looks like an economic slowdown in the first and second quarter of next year, maybe something like half a percent to 1% growth. I have seen recession forecasts of minus 1%. And I've also seen a bullish GDP forecast for next year of 2%. So the numbers are all over the place. To us, it looks like some modest weakness next year, certainly in the first half of the year, in the neighborhood of a half a percent to 1% GDP growth.

Now the two biggest reasons, I think, why we haven't had a recession yet in spite of a whole lot of Fed tightening is shown in a couple of charts we have in the outlook, one of which looks at corporate interest payments and the other one looks at the corporate-sector financial balance. So normally, two things happen when the Fed raises rates. Number one, it catches the corporate sector off balance.

And the corporate sector typically, heading into a recession, is over spending in terms of cash-flow generation relative to its capital expenditures. And so all of a sudden, Fed tightening knocks the corporate sector for a loop. They have to tighten their belts really tightly. And that contributes to the recession. And on top of that, corporate interest payments go up a lot because of rising interest rates.

Well, this time neither of those two things is happening. This time corporate cash flow is in surplus as the Fed tightened. And for whatever reason, most of which has to do with the Fed-- with most companies having termed out their duration of their debts-- rising interest rates has not yet led to an increase in net interest payments as a percentage of profits. It's remarkable. We have a chart in here that shows just how unique that is.

It could have something to do with the fact that this was-- people had 10 years to, during a period of financial depression, to term out their debt maturities. And so finally they did. Now usually recessions begin around seven quarters after the first Fed hike. And that's where we stand right here, as 2024 begins. And so we don't know for sure that there's not going to be a recession and if there were one, it might not have already happened. It might be happening over the next two, three quarters. But again, right, now I think it's roughly a 50/50 call. And if it does happen, it's a mild one.

What's notable is for all of the consternation about commercial real estate, if you look at that cash flows and NOI and delinquencies, it's really just the regional malls and commercial urban office space that are getting crushed. The delinquency data is actually getting much better for hotels, industrials, multifamily, and even retail once you strip out the regional malls. And so we have a chart in here on that. It is consistent with an economy that has some real isolated weak points, namely regional malls and office, but where the rest of it is doing OK.

And similarly, in households, the scary cycles are when all the delinquency rates go up together. What we have now is a weird one, where subprime auto delinquencies are off-the-charts bad. But subprime auto is about 20% of the overall auto-origination market. So that's not terrible.

And credit card delinquencies are weakening. But prime auto loans and first and second mortgage delinquency rates are very well behaved and as tight as they've been over the last decade. So again, isolated pockets of weakness but nothing really systemic at this point.

Now as tarnished a phrase as "mission accomplished" has been historically in the United States, I think the Fed's mission is mostly accomplished. When we look at different cuts on CPI-- and we show three of them here-- and then we look at falling supply-chain pressures, rising auto inventories, falling used-vehicle prices, declines in very timely measures of residential rent inflation, and also very large amounts of multifamily supply coming online, I think the Fed's justified here in pivoting and thinking about easing rather than tightening.

Similarly, the wage-inflation numbers, those are the things that concern me more. A few months ago, I thought we maybe would be in a situation where consumer prices are falling but wages are really sticky and aren't falling. They've started to roll over-- from high levels, yeah-- but they're starting to roll over.

And then importantly, we're seeing a ton of data, most of which supports the fact that there's weakness in the labor market, declines in temporary help, manufacturing hours, unit labor costs, job-switcher premiums, like how much people get paid when they go from one job to another. Female labor force participation rates are rising. So a bunch of indicators suggest that wage inflation is going to be rolling over as well. So in terms of what the Fed is up to, I think they're justified in thinking about easing.

Now where does that leave the equity markets? The equity markets are-- they're not as expensive as they've been but again, they shouldn't be because now we're in an environment of positive real interest rates again. So those crazy high multiples in 2020 and '21 no longer make any sense at all.

And whether you're looking at the market cap, weighted S&P, or the equal-weighted S&P, the multiples are a little on the high side. To us, 2024 looks like a year with single-digit earnings growth, single-digit returns on the median stock. And if we have to go hunting for sectors, valuations in industrials and energy look interesting. And there's nothing, I think, that's going to stop the mega-cap stocks other than a large shift in antitrust enforcement, which we'll talk about in a minute.

But the bottom line here is that the rally towards the end of the year ended up with the market's pricing in a very soft landing already. So I think there's a lot of soft-landing good outcomes that are already priced into the markets.

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