Tag Archives: U.S. economy

In An Uncertain World

By Larry Luxenberg  

We fool ourselves if we ever think that we can foresee the future but some times are murkier than others and now certainly fits that bill.

My test for this is to think back on the last week, the last month, the last five years and consider all of the major things that have happened and how unlikely it is that anyone could have predicted many of the major developments.

People do not like to think that they have limited visibility into the future. It’s especially important when we have our investment hats on that we realize the limits of our knowledge and act accordingly.

An investor must be an optimist or else they would not invest. They must believe that the future is brighter than the present, that there will be inventions and progress that will generate returns to those who make their capital available to promising ventures.

But just as surely an investor must realize that bad things happen to good people and investors should control what they can control and weigh risks carefully before deploying capital.

Applying my test and going back five years to late February, 2020, we were on the verge of the biggest global health crisis in a century. For the first time a huge chunk of the modern economies was deliberately being shut down. We were in the final year of the first Trump Administration. Russia had not yet invaded Ukraine, artificial intelligence was a term, not a “thing,” and cryptocurrency had not yet reach trillion-dollar status.

That spring of 2020 was a time of great fear. People were hunkered down to avoid the deadly disease and the stock market declined the furthest in a short time – by nearly half in less than a month – of my nearly half century career on Wall Street. The collapse of economic activity was the greatest in a short time since the Great Depression of the 1930s. In one week alone, more than 10 million people lost their jobs; a week unlike any in American history.

Over the next several years more than one million people died at least in part because of Covid 19. We will never know the exact total and defining a Covid death is remarkably difficult but we can be confident that it was a lot. Despite this towering loss, the economy and the stock market bounced back much, much faster than most serious observers thought possible.

On March 23, 2020, the Federal Reserve announced that it was coming to the rescue and that marked the bottom of the bear market. The stock market sprang to life before the epidemic had barely begun to exact its grisly toll.

A friend asked me for my prediction of when the economy would start rebounding and I predicted by Memorial Day. In retrospect, ludicrously wrong. And yet not too long afterwards the economy began to respond.

One of the biggest surprises for me, while I was still in hiding in a secure location, was that most people decided this was a great time to buy a new house and the housing market had one of its greatest surges in history.

Another, perhaps even bigger surprise, was that policymakers got their economic responses quite close to an optimal mix. Shutting down a massive economy and then trying to bring it back to life was largely unheard of and no one really knew how to respond. The Federal Reserve was as aggressive as it ever gets and Congress and the Administration shoveled large piles of money at the problem.

Despite the great unknowns, these leaders came unusually close to the proper response. Looking back, it’s clear that they went a bit overboard and triggered a several year surge in inflation. But the risk of falling short was far greater and a shortfall in stimulus could have resulted in a severe recession or depression that could have lasted decades.

Widening our scope to take in the last two decades, it’s clear that people are still traumatized by the mortgage and financial crisis of 2007-2009 as well as the Covid economy and its aftermath. The response around the world to the aftershocks could lead to a third trauma. We have no idea what this third trauma could be but trying to regain your footing after some big stumbles can be quite difficult.

Policymakers are grasping at solutions to what appear to be difficult to define problems. Nearly every major country and alliance has taken major initiatives — perhaps gambles – and no one can be certain that they are even attacking the right problems. The global upheaval seems at least on a par with the scale of change we normally see after the end of a major war or some similar big event.

Most Americans believe the country is on the wrong track. It’s impossible for them to believe that the U.S. has emerged from these two decades of turmoil in better economic shape than just about any other major country. By most measures, the U.S. economy is in as good a shape as it’s been for a half century.

The inflation surge has reversed and while prices remain elevated, new price changes are muted. Unemployment has ticked up and may be in a danger zone that portends a recession but employment is still close to the best it’s been in a half century. Wages have been going up for seven or eight years, particularly among low earners.

While the labor market is not as strong as it was a year ago, jobs are still plentiful although not every opening fits a candidate. Housing is a problem for new buyers as prices remain high along with mortgages and house are difficult to afford for new buyers. Those who have owned houses, by contrast, are in good shape.

Why then so much fear and discontent? We have been going through massive changes for the last few decades and that scale of change is unsettling and scary. As our society turns inward, these fears could become self-fulfilling.

Despite these concerns, the U.S. stock market has been unusually strong for several years, showering riches on investors. This quiet bull market has been led by large, high profile technology stocks and has produced one of the best periods for wealth creation in history. These gains are not as widely distributed as some other sources of income, but through IRA retirement accounts and 401ks, stock market gains do reach many Americans.

In 2024, the U.S. stock market completed two years of back-to-back gains of more than 20 percent, one of only five such times in the last century and the first since the late 90s. In 2024 alone, the stock market reached 55 new highs and added $12 trillion to its total market capitalization, ending at $62 trillion.

It has been a highly unusual period because so much of that stock market value is held by a handful of stocks, mostly the high-profile technology stocks: Apple, Microsoft, Nvidia, Amazon, Google, Meta and Tesla. The top 10 stocks in the S&P 500 make up more than one-third of the value of the index, almost double the percentage of eight years ago.

This has resulted in these stocks being very highly valued and vulnerable to any short-term setbacks. In the last two weeks, the Nasdaq composite index, reflecting largely these stocks, has corrected by more than ten percent. At the same time, gauges of investor fear have surged and consumer sentiment has deteriorated. We have also witnessed a small rotation of stock market leadership to non-technology stocks.

We should not, however, rush to judgement that any of these trends will continue. Stock market and economic trends are only clear in retrospect because lots of little moves and false starts are common. For generations stock market analysts have tried to find predictable patterns to guide their investing and these efforts have generally failed. To deal with the huge amount of information humans see every day, people try to categorize and find patterns as much as possible even in the face of random data.

A good example of the difficulty of determining trends is that several years after a recession ends, a committee of the National Bureau of Economic Research, with many of the top economists in the country, looks at all the data and argues about when the recession began and ended.

Modern stock market analysts, armed with the fastest computers and artificial intelligence, constantly probe for profitable patterns. The rewards for finding clues to market movements are immense but success is so far beyond our most advanced capabilities.

So, sad as it is, the best course that practitioners and academic financial theorists have found is simply to ride out these market waves, accept the amount of risk appropriate for each investor and recognize that the future will unfold in new and exciting ways.

March 10, 2025

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A Reasonable Request?

By Larry Luxenberg  

Last week a client told me that he believed a recession was imminent and he wanted to take investment actions capitalizing on that view.

At first blush, this seems to be a reasonable request. Many commentators foresee a recession as the result of the Federal Reserve’s aggressive interest rate tightening cycle.

However, this view reflects several beliefs about investing that are simply not true. One of the main suppositions is that the stock market acts in line with what is happening now. In fact, the stock market tends to take a collective view of the economy 6 to 12 months ahead and discount those future events.

In the case of this expected recession, if it’s visible now, stock market action should have discounted it last year.

Even more difficult is the idea that anyone can predict a recession ahead of time. To get an idea of how difficult it is to predict a recession consider this. Officially, recessions are designated by a group of nationally prominent economists at the National Bureau of Economic Research. One of the main indicators of a recession is two consecutive quarters of decline in Gross National Product. However, the economists look at many indicators of economic activity in determining when a recession began and when it ended.

But what’s most telling about this group of distinguished economists is that they determine the dates of a recession several years after the recession has ended and the subsequent recovery is well under way. In essence they struggle to call the recession afterwards and don’t even attempt to predict it ahead of time.

So what my client wants to do is something no economist would hazard and after he accomplishes this feat he then has to backtrack as much as a year to capitalize.

If you ask for the impossible, often you will be disappointed.

Instead, it makes more investment sense to take into account the regular occurrence of recessions and bear markets when you put together your investment portfolio. Being able to ride out these downturns without shifting positions has produced powerful long-term returns.

Over the last century, investors in the largest American companies (measured by the Dow Jones Industrial Average and the S&P 500) have doubled their returns on average every seven years. This doesn’t occur like clockwork but the longer you give it the closer you’ve gotten to these results.

When I began my investment career in 1982, the Dow hovered around 800 as it emerged from a two year double recession. Today, after a terrible period for the stock market, the Dow is almost 33,000.

That’s a great period for investors who shunned predictions and stuck with the market through thick and thin. Trying to save yourself some short-term pain is just as likely to sabotage your long-term performance as it is to help.

If there was a way to avoid the pain, I would be among the first to sign up. Instead, I do the next best thing. Put together a diversified portfolio that’s designed to prosper despite market swings and keep my investments intact as best I can.

No one knows whether this approach will work in the future but it makes more sense than trying to find a better crystal ball.

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Less is More Sometimes

By Larry Luxenberg  

As a result of the pandemic and economic downturn, there are now two kinds of Americans: those who are spending less because they have less money and those who are spending less because they don’t have anywhere to spend their money.

For an economy that is two-thirds driven by consumer spending, that doesn’t bode well for a quick recovery and overall statistics. But despite the crude economic measures we employ, the true purposes of an economy are to satisfy people’s needs and wants. If we possessed better statistics, those measures might paint a different picture.

For the first group, suffering will be epic — high joblessness lasted 6 to 8 years after the Great Recession and food insecurity remained high even longer —  and the bleak statistics will adequately measure their distress.

But for the other 75 to 90 percent of Americans, the picture could be quite different. Economists assume that every dollar spent is for something a consumer wanted and if they can’t have it or have to substitute something else, their satisfaction is diminished. That, of course, is a good shorthand and adequate in normal times.

What we are living through is anything but normal and normal statistics don’t capture our current experience. As half or more of the population lives through an enforced idleness, satisfaction has to come through different means. A leisurely trip to the mall is out. A free zoom call with distant friends and relatives is in. People are reaching out more and spending less on leisure pursuits, apparel, fixing up homes and myriad other things.

Many people remind us that “if you have your health, you have everything.” For the million or more people who have contracted the virus and for the 80,000 or so who have died, their health is compromised or they have succumbed. Stress has soared and with it crabbiness, abuse, substance overuse and mental illness.

For others, who retain their health, many have regained an appreciation for the simple pleasures of life that do not carry dollar signs. For large segments of the population, such as the vulnerable elderly, their first impulse after a murky loosening or even an all clear signal will not be to shop until they drop. Their first, second and third impulse may be caution and to keep the purse strings tightly clamped.

The result could be continued high unemployment, the failure of many already shaky businesses, and continued weakness in measured Gross Domestic Product and other key traditional economic measures.

But what of true happiness? That’s a harder thing to measure. Many people hanker for a simpler time. Now that it has been delivered to their doorstop, they may find that they don’t like that imaginary simpler time. But others may find that spending and happiness are not the same and while traditional measurements of economic activity continue to look dreadful, they are fulfilled and much happier than the economists believe that they should be.

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Out Like a Lion

By Larry Luxenberg  

March is typically an odd month, the transition from the harshness of winter to the promise of spring. This year it’s been the reverse in the worst way in modern memory.

The month began in New York as a normal time with mild weather, the stock market near record levels and unemployment at a half century low.

March ended in a totally unprecedented way with two-thirds of the country confined to their homes, an explosion of illness and death across the U.S., the biggest jump in unemployment on record by a factor of five and $8 trillion of stock market value wiped out.

Congress had just approved a record bailout of everyone, adding $2 trillion of debt to plug massive holes in an economy at a self-imposed standstill. Coronavirus cases had gone from a handful to more than 100,000, making the U.S. suddenly the world leader.

Muddled mixed messages proliferated and fear was rampant. While glimmers of hope popped up here and there like the regular appearance of forsythia, cherry blossoms and daffodils, the gathering storm overshadowed everything as the world braced for the mysterious plaque to strike and dissipate.

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Good News for Investors

By Larry Luxenberg  

Recently, economic columnist Robert Samuelson wrote a column explaining why so many ordinary Americans perceive their situations as terrible despite what is frequently described as a great economy with record low unemployment.

His argument is that these workers are comparing their situations — lack of raises. a struggle to support their families and to get ahead — with that of a recent golden era. Samuelson maintains that the previous golden era was the result of unrepeatable forces.

This may not seem like good news for investors but their fortunes are not closely tied to workers. The long sluggish recovery that has lasted nearly 10 years is better for investors than the boom/bust of earlier, more robust recoveries with stronger growth but more frequent recessions. Often, what’s good for workers is also good for investors but not always and this may be one of those cases.

What economists at Pimco have termed “The New Normal” may leave workers pining for a bygone era but investors may applaud. Investors have been fretting that the Great Bull Market that began in August, 1982 and carried the Dow Jones Industrial Average to 10,000 in the late 1990s before resuming in March, 2009, may be nearing its end.

Instead, despite trade wars and unraveling of international alliances and general disquiet and upheavel, the long-term picture for investors might remain bright.https://wapo.st/2mClCV4?tid=ss_mail&utm_term=.5a152b7d96be

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Monetary Policy at a Crossroads

By Larry Luxenberg  

How Now Goes the Fed?

For nearly a decade, the Federal Reserve was largely on the sidelines. After reducing interest rates to close to zero in the wake of the Great Recession, they were reduced to less powerful weapons. In this period they adopted “quantitative easing,” where the numbers are big but the effect less clear.

Now the Fed is back. They have repeatedly declared that the economy is sound and it’s time to “remove the punch bowl” before the party gets out of hand. While the U.S. economy is not booming, it’s the strongest it’s been in more than a decade and may well be gaining momentum.

Fed policy takes time to bring about the desired effects so it must act ahead of time and anticipate the future. Even so, the Fed relies on data and trailing information about the economy and so usually operates behind the curve. We ask the Fed to do the impossible — accurately foresee the future — and are disappointed, even hostile, when, as most often is the case, they err.

What are the chances that this tightening cycle will be successful and how will we judge that success? At the same time, the Fed plans to sharply trim its record four trillion dollar balance sheet.

As a conservative institution, as a committee, and as a seer, the Fed operates  with challenges and consensus as they try to steer the world’s largest economy on the narrow path of prosperity and avoid a recession.

We are on the verge of the longest expansion in history and the odds of the Fed triggering a recession soon are high. This need not be a disastrous recession and perhaps will be one that markets can shrug off with a short pause.

Nonetheless, the Fed faces difficult challenges as it tries to nurse this economy through a period of sub-par growth while avoiding calamity.

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Hamilton’s Blessing

By Larry Luxenberg  

Interest in the U.S. national debt seems to have diminished. Its importance has not.

Even with extraordinarily low interest rates, interest on the debt takes up one out of ten dollars of federal expenditures. If rates rise to more normal levels, even if the debt stabilizes, interest on the debt could easily double or triple.

Recently we came across a book titled Hamilton’s Blessing about the history of America’s debt going back to the founding fathers. It’s instructive that in earlier years the debt ran up during wars and crises and in between times was paid down.

Except for three years at the end of President Clinton’s term, that hasn’t happened in more than half a century.

While not an imminent danger, no initiative in Washington shows promise for getting this problem under control. The Tea Party made some noise but disappeared during the great budget compromise of 2015, when spending ramped up again.

At the least, the government should be extending the term of the outstanding debt while rates remain extraordinarily low.

The debt need not be a crushing burden but needs to be dealt with in all its dimensions in an intelligent way before it becomes an insoluble problem.

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A Dark and Dangerous World?

By Larry Luxenberg  

For years I’ve felt like a lonely optimist in a dark and dangerous world.

In 2007, the U.S. economy was booming. House prices soared, unemployment was rare and anything seemed possible.

Then came the Great Recession, stock market collapse and the world financial system’s near failure. No one knew what to do.

Since that scary winter of 2009, the U.S. economy has rebounded. Car sales have doubled and housing starts quadrupled. The unemployment rate is half the recession peak.

Anecdotally, the pickup is dramatic. Help wanted signs have sprouted in store windows, trucks clog highways and realtors occasionally smile. The stock market has nearly tripled. For the first time in years, U.S. energy independence is possible.

Yet most Americans believe the country is on the wrong path. Only a month ago, the stock market plunged amid a weakening economy and troubles in China.

While problems never disappear, perspective is in order. U.S. GDP is up $3 trillion from the recession low to $17.4 trillion. The number of people with jobs in the U.S. is up by 10 million from 2009 to 148 million now.

Is everything perfect? No. But gloom and doom are overstated. After a scary drop in late August and September, the stock market rebounded and is flat for the year.

An investor must be an optimist and it’s possible they are at least partly right.

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Budget Deficit Shrinking Fast

By Larry Luxenberg  

During the tumultuous political climate of the last five years, nothing has been more contentious than the U.S. budget deficit and government spending.

While Congress and the Administration have been fighting tooth and nail over this, shutting the government on several occasions and forfeiting the country’s AAA bond rating, something surprising has happened.

Both sides are bracing for a possible government shutdown again this fall and no one seems to notice that the deficit is fast disappearing.

Today, The New York Times reported in a small, single column story on the bottom of page B6 of the business section, that the deficit will shrink by 15 percent this year and by 75 percent since the first year of the Obama Administration.

As the economy healed from the Great Recession, taxes rose and spending has slowed and in some cases declined. A deficit that had reached a mind boggling $1.6 trillion is headed for $425 billion this year, down from $483 billion last fiscal year (the government year ends Sept. 30).

While still humongous in dollar terms, it’s not bad in an $18 trillion economy. After six years of spending austerity, the budget is now rising again, but still slower than revenues.

It’s not that there aren’t fiscal issues — entitlement spending still needs big changes and the government debt needs to be extended — but the fiscal crisis has ended long before the wrangling stops. http://www.nytimes.com/2015/08/13/business/economy/us-budget-deficit-rose-in-july-but-8-year-low-is-expected-for-year.html?smid=tw-share

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U.S. Budget Deficit Shrinks

By Larry Luxenberg  
The Dog That Didn’t Bark This summer the Washington Post had an article titled,” So Whatever Happened to the deficit?” Not quite a year ago, House Republicans threatened to shut the Federal government as part of their effort to lower the deficit. Meanwhile, while no one was looking, the deficit shrunk dramatically on its own. The deficit has shrunk from an unsustainably high $1.6 trillion in 2009 to an estimated $500 billion for the fiscal year that ends in a few weeks. The deficit will keep dropping as long as Congressional gridlock prevents new spending. Most economists consider the current level sustainable. Meanwhile, the economy has continued a five-year expansion. While the economy isn’t back to where it was before the Great Recession, this is a huge improvement from those dark days of late 2008 and early 2009 when the world economy threatened to collapse completely. As a result, the stock and bond markets have staged dramatic, if unheralded rallies. The stock market has nearly tripled from the bottom in March 2009 and the broad bond market is up more than 30 percent, according to Bloomberg. While none of this feels like a boom because it isn’t, the trends are good and investors shouldn’t be overly pessimistic.
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