Weekly Wisdom – March 9, 2024

By Hightower Great Lakes on March 8, 2024

Event Overview

On Wednesday, March 6, the Investment Solutions team hosted our third annual A Day with the Investment Stars event. We captured insights across five different panels of CNBC friends and colleagues. The discussions focused on investment ideas, monetary and fiscal policy, and long-term themes that the investment stars are implementing in their portfolios.

There were in-depth conversations centered around the U.S. consumer, energy tailwinds, industrialization, emerging markets and the Federal Reserve’s next move.

Consumer Strength

Most the stars indicated that the U.S. consumer is in decent shape – something that we’ve been talking about for the past few years. Recall, the U.S. consumer remains a critical engine driving the nation’s economy, accounting for 70% of U.S. GDP.

The job market has been strong after the Covid lows, which has led to higher wages running at 4-5% y/y growth. Inflation has progressed from 9.1% peak levels to 3%, which has also aided the consumer.

As a result of the consumer’s importance, GDP has been running above trend – something that most weren’t expecting in 2023 and early 2024. Above-trend GDP expanded 4.9% in Q3 and 3.2% in Q4, and according to the Atlanta Fed GDPNow tracker, Q1 is up 2.5% y/y growth.  

Notably, Dennis DeBusschere of 22V research pointed out that Bank of America (BAC) reported a significant increase in checking account balances, with its lowest-income customers experiencing a fourfold increase from pre-pandemic levels.

This rise in savings among even the most budget-conscious segment of the population underscores the overall financial health of the U.S. consumer and their willingness to spend. Tom Lee of Fundstrat gave us insight and reminded us that it is typically a good time to add to consumer exposure in a portfolio when consumer confidence bottoms – and we are likely there.

Additionally, Anastasia Amoroso of iCapital reminded us that 78.7% of U.S. homeowners are locked into fixed-rate mortgages below 5%, shielding them from higher mortgage rates. This financial stability, coupled with record-high household net worth, creates a comfortable foundation for continued spending.

As we have noted, the U.S. is short 5 million homes, with 14 years of underproduction and 5 million millennials about to start buying first-time homes. Housing remains a top idea for us in 2024.

While the long-term economic outlook remains nuanced, these indicators suggest that the U.S. consumer is well-positioned to support economic growth.

Still Early Innings for AI

AI is a prominent theme in the market and hard to ignore. Invesco’s AI and Next Gen Software ETF (IGPT) returned 27% in 2023. The S&P 500, which has an approximate 30% weighting to technology, followed suit with a 26% total return in 2023.[1]

Our panelists agreed that we are only in the first or second inning when it comes to AI. The total addressable market is expected to grow to $1 trillion by 2030 versus today’s $300 billion. Companies that produce essential hardware like semiconductors have seen the benefit.

This hardware is the building block that makes further AI innovation possible. While most will point to Nvidia (NVDA) as the best way to play this theme, there are several winners. New York Life’s Lauren Goodwin pointed out that the next wave of AI investment could shift towards use cases that leverage AI products as opposed to AI-related hardware.

AI innovation has the potential to address the lack of labor with which the U.S. and the rest of the world are currently grappling – improving efficiencies and lowering costs. Currently, the seasonally adjusted U.S. unemployment rate sits at 3.8%, far below the long-term average of 5.7%.[2]

Fundstrat’s Tom Lee predicted that the current global labor shortage will be an issue until at least 2035, which will only incentivize automation and AI to make up for this lack of labor.

Onshoring Wins

As a result of the supply chain disruptions caused by the pandemic, as well as rising geopolitical tensions, many companies have begun to diversify their supply chains away from China. These supply chains are making their way to the U.S., Mexico, Canada and elsewhere. This onshoring theme provides an opportunity for several industries including energy, industrials and financials.

U.S. energy companies should see a benefit here as they offer geographically reliable sources of power for these new industrial facilities, which includes AI and data center applications. Open AI’s Sam Altman highlighted this point at Davos back in January, saying that “an energy breakthrough is necessary for the future of AI” due to its significant power consumption.[3]

In an increasingly tense geopolitical world, it may become more difficult to secure this crucial energy from foreign adversaries. Industrials should also see the benefit here by supplying the parts needed to make these new factories operational. And finally, someone needs to fund the construction of these new facilities – that is where financials can play a role.

Chart 1: Map of U.S. Datacenter Locations [4]

As debriefed in last week’s Weekly Wisdom, U.S. manufacturing has found a bottom and begun expansion. Requisite Capital Management’s Bryn Talkington stated small cap industrial ETFs as an idea to play to American strength with expected rate cuts on the horizon. The industrials sector remains a core idea for 2024.

Federal Reserve Expected to Stay Patient on Rates

Jerome Powell on Capitol Hill Wednesday morning stated it will, “…likely be appropriate to dial back policy restraint at some point this year.”[5] CME’s Fed Watch Tool is heavily weighted toward no rate cuts in March and May and is predicting a 56% chance for a 25 bps cut in June.[6]

Most of our panelists held the belief that cuts will come in the latter half of this year, but the extent of cuts might not be as high as market participants expect. The Fed’s preferred inflation measure, Core PCE, rose in line with consensus at an annualized rate of 2.8% (the least since March 2021).

This is down from the highs seen in February 2022 at 5.57% annualized. February’s Core PCE report will be released on March 29 with the current consensus at 2.7%. A few more months of Core PCE persistently trending downward might mean that the Fed has enough evidence to begin easing its policy rate.

Small Caps: A Divergence of Opinion

Small cap resurgence was another topic highlighted by a number of panelists this year. Liz Young of SoFi noted that small caps are a strong gauge for investors’ risk appetite. Over the last year, small caps have been trading cyclically, often hitting a ceiling and failing to break out above.

This trend broke out the end of 2024 and has held steady, indicating a possible sign of a broadening out beyond the Magnificent 7. Alternatively, Barry Knapp from Ironside Macro is bearish on the small cap sector due to slow lending and labor constraints.

A Growing Landscape for Private Market Opportunities

In compliment to public market securities, private markets were a hot topic, as they may be sources of return and diversification. Private equity produced average annual returns of 10.48% over the 20-year period ending on June 30, 2020.[7]

iCapital’s Anastasia Amoroso’s belief is high net worth and institutional investors should have a 40-50% allocation to private markets. She expressed that only 30% of advisors invest in private markets, with most only allocating 3-5%.

In today’s inverted yield curve environment, bank lending remains slower than historical periods. Private equity and credit funds can be other sources of capital in these environments when lending standards are tightened.

Canaccord Genuity’s Tony Dwyer pointed out that there were 5,000 publicly traded companies in 2002, and today there are roughly 4,000. Meanwhile, private companies have grown to roughly 12,000 today versus 5,000 in 2002. Private market funds have become a viable and more accessible asset class for investors throughout the recent decade.

Click here to read last week’s Weekly Wisdom (2/28).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: Bloomberg. As of March 6, 2024.

[2] Source: Bloomberg. As of March 6, 2024.

[3] Source: Reuters. As of January 16, 2024.

[4] Source: SPglobal.com. As of October 16, 2024.

[5] Source: Federal Reserve. As of March 6, 2024.

[6] Source: CME Group. As of March 6, 2024.

[7] Source: Investopedia. As of March 6, 2024.