The list of economists and strategists who have gotten it right this year, whose opinion I respect (important caveat), is a very short one. As a matter of fact, I only have one guy on it. Certainly, there are others who were bullish coming into 2023 on the economy and on equities, but they tend to be the people who are always bullish. They were bullish into 2008 and they were bullish into 2022.

But Neil Dutta, the Head of Economics at Renaissance Macro Research is someone who has shown the flexibility to follow data where it takes him whether that be bullish or bearish on the US economy. He is someone whose views I have followed closely, and he is one of the first economists this year to make the case that despite all the rate hikes, the Fed has still not adequately tightened financial conditions. Mr. Dutta over the last six months has been insistent that the Fed would have to stay hawkish for longer, because housing and consumer spending are in better shape than the economic bears believed. Mr. Dutta wrote an essay published this morning titled, “The economy’s Doomsday Clock has been reset”. His argument is that the odds of a recession have been “fading rapidly” as housing appears to have re-accelerated and nominal income is holding up better than other sources of inflation thereby boosting real incomes. He argues that while there are some preliminary signs of weakness, the preponderance of employment data remains strong.

 While I have not been as sanguine on the overall economy as Mr. Dutta, I have been making the point for several months that accumulated savings from the pandemic era stimulus and the “Golden Handcuffs” dynamic of the housing market were elongating the time it has taken for the Fed to engineer a slowdown.  

Let’s not give Mr. Dutta too much credit. The powerful and ubiquitous hand of randomness had a lot to do with the strength of stocks and the resilience of the consumer year-to-date.

• Nobody went out loud with the idea that there would be a balance sheet duration crisis amid the regional banks that would ultimately prove stimulative to markets as the extraordinary stabilization actions taken by the Treasury and Fed ramped various measures of liquidity.

• I don’t remember hearing any economists make the call that the Chinese demand recovery would be anemic while the pariah states of Russia, Venezuela and Iraq overproduced, driving down oil prices and providing a powerful disinflation tailwind.

• On January 1st, NVDA was at $143, up from its October lows around $112, and now amid the exuberance over AI, ChatGPT and other large language models (LLM’s), the stock is now at $423 at a valuation north of $1T. Suffice it to say that not even the most cheerleading of analysts covering the stock on Wall Street thought an AI speculation tsunami was coming. Only a year ago, there was greater focus in the semiconductor analyst community on Nvidia’s presence in digital currencies than AI. To state the obvious, the resilience of consumer spending has nothing to do with surging tech valuations.

That being said, and in fairness, the resilience of the economy has undoubtedly enabled at least some of the strength in stocks. Mr. Dutta was absolutely on an island early in the year expressing his deeply contrarian view, and he deserves a ton of credit for being resolute and being right.

As for the outlook, I disagree with Mr. Dutta’s conclusion that “the Fed has already been tightening for 18 months, and it's the interest-rate-sensitive areas of the economy that have shown improvement of late — if anything, the economy has already digested the hikes and moved on.”  The consumer is slowing but slowing from unprecedented stimulus fueled nominal growth briefly running over 20%. Excess saving is slowly being exhausted. Every day, another business is rolling a term loan for something below 4-5% to something over 8-9%. That is what Milton Friedman was talking about when he discussed “Long and variable lags”. The fact that the lags are longer does not mean that the lags don’t exist. While new housing is likely to remain strong, that strength ignores the weakness in activity in the far larger existing home market. 

I remember far too many times when the home team over-celebrated with too much time left on the clock. The clock on this cycle has a lot of time left. The Fed continues to raise interest rates. Credit continues to tighten. Has it mattered to the economy as much as most forecasters believed. No, not yet, but of course it will.  The 2s – 10s inversion consistently plumbs new depths for a simple reason: the bond market expects the Fed to be cutting rates in response to economic weakness. The Fed is going to continue to tighten financial conditions until they get nominal wage growth down and that has proven difficult to do. The Fed will be as hawkish as they need to be to get the job done. That does not portend well for growth. Remember, Don’t Fight the Fed.

WealthVest makes no representation or warranty, expressed or implied, with respect to the accuracy, reasonableness, or completeness of any of the statements made in this material, including, but not limited to, statements obtained from third parties. Opinions, estimates and projections constitute the current judgment of Tim as of the date indicated. They do not necessarily reflect the views and opinions of WealthVest and are subject to change at any time without notice. WealthVest does not have any responsibility to update this material to account for such changes. There can be no assurance that any trends discussed during this material will continue.

Statements made in this material are not intended to provide, and should not be relied upon for, accounting, legal or tax advice and do not constitute an investment recommendation or investment advice. Investors should make an independent investigation of the information discussed in this material, including consulting their tax, legal, accounting or other advisors about such information. WealthVest does not act for you and is not responsible for providing you with the protections afforded to its clients. This material does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product or service, including interest in any investment product or fund or account managed or advised by WealthVest.

Certain statements made in this material may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such statements. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.

The S&P 500® is a trademark of Standard & Poor’s Financial Services, LLC and its affiliates and for certain fixed index annuity contracts is licensed for use by the insurance company producer, and the related products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC or their affiliates, none of which make any representation regarding the advisability of purchasing such a product. WealthVest is not affiliated with, nor does it have a direct business relationship with Standard & Poors Financial Services, LLC.