Investors should not be overly distracted by the recent spate of political headlines and social media updates. This is not to imply that we ignore relevant and important news stories that impact our world. We simply suggest that investors resist the urge to react based on emotion or make important financial decisions on news or posts that may be more political in nature and ultimately have little to no impact on our financial lives.
This is the environment where managers like us that incorporate behavioral relief valves into their investment process can help even the most headline sensitive investors differentiate between volatility that may represent an opportunity from volatility that may be indicative of a more serious market dislocation.
We often say that the government can create headwinds and tailwinds for particular economic sectors and industries. For example, increased defense spending can be a tailwind for defense contractors while more regulation or tariffs can create headwinds to the automobile industry. However, it is the private sector in aggregate that dominates the economy.
Despite all of the attention paid to government spending, it only made up 17% of U.S. GDP in 2024. Business investment accounted for 14% of U.S. GDP, while net trade detracted 3% from GDP. More importantly, residential investment and consumption comprised 4% and 68%, respectively. As a result, household spending and residential investment made up 72% of GDP and dominated the economy. This mix is consistent with historical norms. When thinking about the U.S. economy in aggregate, the primary factors to watch are jobs creation, personal, income and spending, and private sector debt.
Jobs creation continues its positive momentum though we expect volatility around the employment numbers, as well as revisions. These are large datasets that track nearly 160 million individuals as well as millions of businesses and households, so volatility and revisions are not unusual. Therefore, we favor looking at averages and trends over time. For example, during the previous business cycle from July 2009 through February 2020, the U.S. economy created 166,000 jobs per month on average. As the following graph illustrates, the current figures are also settling in at around 166,000 jobs per month on average. This amounts to nearly two million new jobs created every year, which drives personal income and spending higher. This is hugely important as household spending and residential investment dominate U.S. economic activity.
Although the daily headlines focus on changes in the government, which amount to 17% of economic activity, the real action is the persistence with which the economy continues to create jobs. Persistent jobs creation propels personal incomes higher. When we include productivity growth, which is primarily driven by innovation, inflation-adjusted earnings can continue to move higher. This contributes to higher living standards over time.
Meanwhile, private sector debt-to-income and debt-to-GDP ratios are holding at healthy levels overall. With the exception of the bottom 20% of income earners who continue to struggle with debt and inflation, the other 80% of households overall are in great shape. Combined with healthy business balance sheets and finances, the private sector is poised to continue to drive economic growth for the vast majority of GDP that is not the government.
INVESTMENT IMPLICATIONS
In turn, we favor U.S. equities over other asset classes. At the sector level, we continue to be overweight consumer discretionary, financials, information technology, and telecom services.
Our view of fixed income is more nuanced as U.S. Treasury bonds and notes have become a bigger part of the fixed income market. The Treasury department issues debt to cover the persistent and growing annual fiscal deficits.
While the U.S. Federal Reserve sets short-term interest rates, financial market participants set the rate for longer-term bonds, such as the benchmark 10-year Treasury bond. We expect that the Treasury will have to issue more 10-year debt to fund continued deficit spending in the months to come. As more of this debt comes to market, the market will decide on the yield.
Recognizing the risks associated with continued fiscal deficits and rising government debt burdens, we are underweight U.S. Treasury bonds relative to the aggregate bond index and overweight other sectors of the bond market that offer a better risk/reward tradeoff in our view.
We are finding a lot of great opportunities to take advantage of higher yields and/or better relative value opportunities in areas like investment grade corporate bonds, asset-backed securities, and mortgage-backed securities. Consider exhibit 4 that shows a yield-to-worst comparison across these investment grade fixed income sectors. The aforementioned sectors offer a nice income advantage over Treasuries without significantly increasing risk.
Overall, our Strategies offer higher yields than their respective benchmarks at lower levels of relative risk. We think this positioning is set to handle market volatility stemming from headline risks or more fundamental risks to the economy and financial markets.
THE CASH INDICATOR
The Cash Indicator (CI) level remains below historical norms as markets continue to exhibit complacency. Complacent markets can be vulnerable to negative surprises. With the positive economic backdrop, we view equity market declines as buying opportunities.
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DISCLOSURES
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.
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