At this point, how the new budget bill turns out is anyone’s guess. Similarly, we are seeing a lot of uncertainty around tariff implementations, let alone their lasting effects. The U.S. Federal Reserve (Fed) seems willing to be data dependent and stand pat on interest rates. Combined, these factors lead us to expect continued volatility in the near term. As investors, we are more interested in the longer term where we see promising trends in the areas that drive economic growth over time.
However, it is important to note that while federal, state, and local government spending combine to make up roughly 17% of Gross Domestic Product (GDP), the private sector is much greater. For example, personal consumption makes up 68% of GDP while residential fixed investment, such as housing, makes up 4% and nonresidential fixed investment, such as private business investment in research and development as well as in manufacturing facilities, accounts for 14% of GDP. Combined, the private sector significantly outweighs the government’s contribution to U.S. GDP.
As a result of the outsized direct impact that households have on GDP (around 72%), there is nothing more fundamental to the economy than jobs, personal income, and spending.
Some factors that are missed in media reporting are that payrolls, personal income (adjusted for inflation and excluding government transfers, such as social security and unemployment benefits), and personal consumption recently made a series of new all-time highs (exhibits 2 & 3). These continued gains reflect the economic strength and resilience of the U.S. economy.
Similarly, large U.S. companies, as represented by the S&P 500 Index, saw record operating earnings over the last year (exhibit 4). Domestic businesses have been investing heavily in plant and equipment as well as research and development. In fact, investments in private nonresidential fixed investment, including manufacturing facilities and intellectual property, recently made a new all-time high. These types of investments drive the industrial capacity and innovation that make our workforce more productive.
INVESTMENT IMPLICATIONS
Until recently, the equity market was rewarding only a small number of companies led by the Magnificent 7. Amid the backdrop of persistent economic growth, the narrow equity market has left a wide range of attractive investment opportunities that we think will reward investors going forward. These opportunities include the insurance and software industries as well as a broad swath of quality businesses that exhibit consistent earnings and low financial leverage. On the fixed income side, we continue to favor intermediate duration high quality asset-backed and mortgage-backed securities as well as investment grade corporate bonds.
THE CASH INDICATOR
After bouncing off very low levels and jumping with April’s tariff-related uncertainty, the Cash Indicator (CI) level has once again settled below its long-term median. This roundtrip from low volatility to high volatility and back suggests that the markets are again looking past potential policy risks. With much policy uncertainty remaining, we expect to see more volatility ahead. However, a positive economic backdrop, led by the private sector, leads us to think that any near-term equity market declines are likely buying opportunities for disciplined investors.
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DISCLOSURE
Any forecasts, figures, opinions or investment techniques and strategies explained are Stringer Asset Management, LLC’s as of the date of publication. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect to error or omission is accepted. They are subject to change without reference or notification. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support an investment decision. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested.
Past performance and yield may not be a reliable guide to future performance. Current performance may be higher or lower than the performance quoted.
The securities identified and described may not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.
Data is provided by various sources and prepared by Stringer Asset Management, LLC and has not been verified or audited by an independent accountant.
Index Definitions:
S&P 500 Index – This Index is a capitalization-weighted index of 500 stocks. The Index is designed to measure performance of a broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
