myICLUB Blog


A Tale of Two Economies, and What to Buy Now


The U.S. economy is still feeling the after-effects of the Covid emergency.

In the early going of the Covid pandemic, consumers hoarded items they feared would be in short supply like toilet paper and cleaning products. Demand for many types of services like travel and dining collapsed. In the next phase, component shortages caused prices of many goods to surge. Then, as Covid restrictions eased and demand returned, labor shortages led to further price increases.

The government played a role as spending levels and easy monetary conditions were left in place for too long even as the worst of the crisis had clearly passed. The Federal Reserve was caught flat-footed, assuming the nascent surge in inflation two years ago to be “transitory.” It has spent the last year and a half making up for its initial failure, raising short-term interest rates from around zero to 5.00%.

While headlines imply that the economy is strong, cracks have begun to appear in the U.S. and globally. To some degree, these trends could simply be a correction of imbalances that occurred early in the Covid period when consumers and businesses hoarded products to avoid running out while shunning services. However, manufactured products are more sensitive to interest rates as these items are frequently bought with borrowed money that went from “free” to very costly.

U.S. employment has remained strong, but cracks may have emerged in that indicator. Inflation pressures are gradually easing. Consumer prices excluding food, energy, and shelter, the so-called “supercore” inflation indicator, rose 3.4% over the past year, half the increase of the 12 month period ended September, 2022 and far below “core” inflation. The reported impact of housing on overall inflation may be overstated, and supercore inflation may better reflect the experience of most consumers.

The global manufacturing recession and ebbing underlying inflationary pressures suggest it is time for the Federal Reserve to pause its rate-hike program to allow a few months for past rate hikes to work their way through the economy.

Stock investors have remained surprisingly calm this year despite the challenges of interest rate hikes, the now-concluded debt-ceiling drama, and uncertain economic growth. This suggests they may be looking past any economic weakness. However, in recent months they’ve shown a strong preference for the largest companies, generally shunning small- and mid-cap stocks. Small- and mid-cap companies are perceived to be more exposed to the domestic economy than their large-cap brethren, and a migration to big stocks might be investors’ way of remaining invested while hedging the risk of a recession.

As always, we believe it is appropriate for growth and diversification purposes to be invested in companies across the spectrum rather than chasing short-term trends. In the July 2023 issue of the Investor Advisory Service our analysts recommend a midsized technology company that is benefiting from the global push for sustainability in emerging markets, a large industrial business that is seeing its growth driven by moves towards energy efficiency in building construction, and a defensive megacap healthcare company.

The commentary has been excerpted from the issue of Investor Advisory Service published in late June. To receive commentary like this in a more timely matter and receive actionable stock ideas each and every month, subscribe today. The Investor Advisory Service stock newsletter was named to the Hulbert Investment Newsletter Honor Roll for the 13th consecutive year for outperforming every up and down market cycle since 2002.

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