Retirement Read Time: 4 min

Five for Friday: March 14, 2024

Sticky Inflation, Covid Crashes, Immigration, Fed Funds, March Madness

1. Inflation

February continued the trend of frustratingly sticky inflation in the U.S., with both headline and core CPI coming in slightly above expectations. And yet, the S&P 500 closed at another new all-time high anyway. Why the lack of concern? Two ideas. First, though inflation was slightly higher than expected, the data reversed much of the scariness from the prior month. Some of the Fed’s more closely watched measures all reversed big jumps in January. Still too high, but not necessarily reaccelerating a la the 1970s, and freeing markets (for now) of worries over that low-probability-high-risk scenario. Second, to the extent the market cares about inflation because it cares of the Fed’s plan for interest rates, this data didn’t move the needle. Both the Fed and the market expect three rate cuts in 2024 – that didn’t change this week.

2. Pandemic

Four years ago, investors experienced what was likely the craziest week in stock market history. The period from Mar. 9 to Mar. 16 featured three of the ten worst days since World War II, and was the first calendar week since 1929 where every day saw at least a 4.5% move. This, of course, was the result of the uncertainty around the rapidly evolving Covid-19 pandemic that would change the world in a million ways over the subsequent years. For investors, my primary takeaway has and always will be this: not one person on Earth would have believed you if you told them that the stock market would bottom only seven days later and go on to rally ~150% over the next four years. And yet it did – even with the economic outlook as clear as mud and a viable vaccine over eight months away. Bear market bottoms occur far earlier than anyone usually expects, and investing through volatility is forever a part of reaping the long-term gains of the market.

3. Supply shock

One path by which the U.S. economy could see strong economic growth AND lower inflation is positive supply shocks in the labor market. Post-pandemic, there was a shortage of workers, which manifested in high wage growth for those still working. Great for them, but bad for inflation since companies tend to pass on higher labor costs to consumers. The remedy for that is either reduce demand for employees (recession) or find more workers – i.e., a positive supply shock. Enter “Big Immigration,” a term coined by Strategas to describe recent labor market activity. They write, “Aging demographics have impeded native-born labor supply – this is a structural concern. But there’s mounting evidence that immigration has allowed foreign-born labor supply to help make up the difference.” The CBO estimates net immigration last year was 3.3 million (against a projection for just 1.0 million made in 2019), and as a result, the Brookings Institute forecasts employment growth in 2024 will be approximately double the sustainable level that would have occurred in absence of the pickup in immigration. Though the politics of the issue will determine its path going forward, a thoughtful approach to “Big Immigration” could be a key to continuing America’s economic outperformance in the coming years.

4. Fed bucks

In recent years, I’ve seen an uptick in questions about a U.S. central bank digital currency (CDBC), i.e., a digital currency issued by the Fed instead of a commercial bank. The pros might include less counterparty risk and more inclusivity for the underbanked, but many also worry about privacy issues around government involvement in personal finance. Regardless, it doesn’t look to be a reality any time soon – Fed Chair Powell recently testified that a CBDC is not “remotely close to happening anytime soon” and that any iteration “would not support any Fed monitoring of personal transactions.” Furthermore, a CBDC is, “something (the Fed) would certainly need congressional approval for.” Given that pushback, these concerns can likely move down anyone’s wall of worry for now.

5. Bracketology

This weekend is “Selection Sunday,” and the AGA estimates that about 56 million people will fill out a March Madness bracket in 2024. In 2014, Warren Buffett offered $1 billion to any Berkshire employee who could correctly pick all 63 games – i.e., a perfect bracket. Luckily the odds are on his side – the odds of a perfect bracket in 2024 are roughly 1 in 9.2 quintillion (9.2 quintillion seconds is a mere 292 billion years). As usual, the odds are better in investing than in gambling, but I, along with 56 million of my closest friends, will still be filling out a bracket anyway. Oh, and Go Cats!


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