Site Search

Looking for something? Use the search bar below or visit our Resources page.


Author ALM First

Published

Subject

Estimated

Economic Update

  • The U.S. economy has outperformed economist and market expectations in 2023 thanks to resilient U.S. households
  • After accounting for inflation, liquid assets of most U.S. households are back to pre-COVID levels, which could lead to more subdued consumption patterns in 2024
  • Fed funds futures repriced for a much more dovish Fed in 2024, which appears inconsistent with current economic fundamentals

As we began 2023, expectations for the U.S. economy were much gloomier than what has actually evolved in the first 11 months of the year. According to Bloomberg’s economist survey in December 2022, the median forecast of GDP growth this year was just 0.37%. However, real GDP has expanded by 2.4% through the first 3 quarters of 2023 (not annualized), and current quarter growth is expected to remain in positive territory. The Fed wasn’t much more optimistic entering this year. The December 2022 Summary of Economic Projections showed a median forecast of 0.5% for real GDP growth in 2023. This unexpected resilience has come despite multiple obstacles, including the bank failures in March, Chinese economic struggles, and geopolitical events. As we have discussed in past commentaries, the stimulus-induced windfall of liquidity for U.S. households created a strong headwind for consumer spending, particularly with the unemployment rate historically low and wage growth historically high. According to Federal Reserve data, household liquid assets, which include bank deposits and money market fund balances, surged in 2020 and 2021, which along with wage growth fueled the better-than-expected consumption over the last year.

Exhibit 1 takes an updated look at household liquidity data through Q2 across income brackets using the most recent information from the Federal Reserve. After accounting for inflation, all but the top 2 income brackets are now close to pre-COVID levels in terms of liquid assets, with the lowest income brackets, not surprisingly, suffering the most from higher prices for goods and services. As such, households may take a more defensive posture on spending in 2024.

Exhibit 1

Markets Pricing For More Dovish Fed

Financial markets priced for a more dovish Fed in 2024 as November progressed. By month-end, fed funds futures priced an initial rate cut in the second quarter, with roughly 135 basis points of cuts by year-end 2024. That would be an aggressive path for the Fed, and there’s clearly a disconnect with the median economist forecast for GDP growth in 2024 of 1.2% with no negative quarters according to the current Bloomberg survey (i.e., soft landing). If upcoming employment and inflation reports reveal stickier employment and inflation data, the market would need to reprice for a less dovish Fed outlook.

We have seen this play out multiple times over the last year and a half. In other words, rate volatility is not likely to return to subdued levels anytime soon, keeping the operating environment for financial institutions challenging for at least the next several months. For the Fed to ease as aggressively as is currently priced in, one would assume a more-than-mild recession evolves in the first half of next year, which would seem to be a low probability event given current economic fundamentals, barring an unforeseen external shock.

To download the PDF of this econ only version, please click here.

To continue reading the full month’s market commentary, and to learn more about current market themes, market sectors, sector performances, and applied strategies, log in to the ALM First portal, and select this month’s commentary in the Resource Center.

If you do not have a login and you would still like to access the document, please send your inquiry to info@almfirst.com.

ALM First

ALM First was founded in 1995 with the focus on financial advisory services for credit union clients.

LinkedIn

  Commentary Disclaimer

ALM First Financial Advisors is an SEC registered investment advisor with a fiduciary duty that requires it to act in the best interests of clients and to place the interests of clients before its own; however, registration as an investment advisor does not imply any level of skill or training. ALM First Financial Advisors, LLC (“ALM First Financial Advisors”), an affiliate of ALM First Group, LLC (“ALM First”), is a separate entity and all investment decisions are made independently by the asset managers at ALM First Financial Advisors. Access to ALM First Financial Advisors is only available to clients pursuant to an Investment Advisory Agreement and acceptance of ALM First Financial Advisors\' Brochure. You are encouraged to read these documents carefully. All investments involve risk and may lose money.

The content in this article is provided for informational purposes and should not be relied upon as recommendations or financial planning advice. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. While such information is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. Statements herein that reflect projections or expectations of future financial or economic performance are forward-looking statements. Such “forward-looking” statements are based on various assumptions, which assumptions may not prove to be correct. Accordingly, there can be no assurance that such assumptions and statements will accurately predict future events or actual performance. No representation or warranty can be given that the estimates, opinions or assumptions made herein will prove to be accurate. Actual results for any period may or may not approximate such forward-looking statements. No representations or warranties whatsoever are made by ALM First Financial Advisors as to the future profitability of investments recommended by ALM First Financial Advisors.

Moreover, this report was prepared as of the date indicated herein. No representation or warranty is made by ALM First that any of the returns or financial metrics detailed herein will be achieved in the future, as past performance is not a reliable indicator of future results. Certain assumptions may have been made in preparing this material that have resulted in the returns and financial metrics detailed herein. Changes to the assumptions may have a material impact on any returns or financial metrics herein. Furthermore, ALM First gives no representation, warranty or undertaking, or accepts any liability, as to the accuracy or completeness of the information contained this report. This report was prepared for informational purposes only without regard to any particular user’s investment objectives, financial situation, or means, and ALM First is not soliciting any action based upon it. This material is not intended as, nor should it be construed in any way as accounting, tax, legal, or investment advice including within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Certain transactions give rise to substantial risk and are not suitable for all investors. The strategies discussed herein can have volatile performance and may employ leverage. Moreover, investment advisory fees and expenses may offset trading gains. This report was prepared by ALM First Financial Advisors, LLC. The hereto mentioned report contains information which is confidential and may also be privileged. It is for the exclusive use of the intended recipient(s). If you are not the intended recipient(s), please note that any distribution, copying, or use of this report or the information contained herein is strictly prohibited. If you have received this report in error, please notify the sender immediately and then destroy any copies of it. ALM First neither owes nor accepts any duty or responsibility to the unauthorized reader. ALM First shall not be liable in respect of any loss, damage, or expense of whatsoever nature which is caused by any use the unauthorized reader may choose to make of this report, or which is otherwise a result of gaining access to the report by the unauthorized reader. This content contains information derived from third-party sources. We believe that this third-party data is reliable; however, we cannot guarantee this data’s currency, accuracy, timeliness, completeness, or fitness for any particular purpose.

INDEX BENCHMARKS: Index performance is discussed for illustrative purposes only as a benchmark for each strategy’s performance and does not predict or depict performance of that strategy. While index comparisons may be useful to provide a benchmark for a strategy’s performance, it must be noted that investments are not limited to the investments comprising the indices. Each of the strategy benchmark indices are unmanaged and cannot be purchased directly by investors.

HYPOTHETICAL PERFORMANCE DISCLAIMERS: Performance figures derived from model portfolios are hypothetical in nature and the results of any individual investor will differ as a result of various factors, including investment limitations relative to model portfolio guidelines, availability of same or similar assets, and fee structures. Investments are presumed to have been made at the beginning of the time period and there are no inflows or outflows of cash during the period. There are limitations and risks associated with the use of model performance or hypothetical performance information, and you should be cautious when looking at any presentation of model or hypothetical performance information. Investment strategies should not be based solely on the use of model or hypothetical information. Actual results will be different from those shown in model or hypothetical performance. The model portfolio returns reflect actual trading including the reinvestment of coupon payments and are net of transaction costs, administrative costs and a strategy-specific per annum fee ranging from 5 bps to 50 bps, which is the amount of the highest fee charged to any ALM First Financial Advisors, LLC customer employing that particular strategy during the period under consideration (the “Model Fee”). Actual fees will vary depending on, among other things, the applicable fee schedule and portfolio size. ALM First\'s fees are available upon request and also may be found in its Form ADV Part 2A. Past performance does not guarantee future results.



Recent Monthly Market Commentary


  Commentaries RSS
Strategic Partners

Let’s Work Together

ALM First is your agile partner with a trusted history of delivering results.