Weekly Investment Update (01/26/2024)

This Week’s Positioning and Views

The general theme of polarization persists within the U.S. political landscape; however, we’ve seen strong bipartisan support for the passage of potentially significant policy stimulus in 2024. Congress could be close to passing a $135 billion tax cut in 2024 that expands the Child Tax Credit and restores business tax deductions that have expired. Most of the resulting tax cuts are on the corporate side and are retroactive to account for deductions, such as R&D and capital equipment expensing, that expired in 2022.

A vote in the House is scheduled for next week, which is expected to receive strong bipartisan support. In total, the fiscal stimulus could amount to nearly 1% of GDP. If ultimately passed in the Senate, we do not believe the resulting stimulus will have a material impact on the Fed’s decision to cut interest rates. However, it could provide an added tailwind to many companies as economic growth downshifts from lofty 2023 levels. We continue to monitor these events and include an update on the outlook for growth and election implications below.

U.S. Economic Growth Exceeds Consensus Expectations

What is happening: Real gross domestic product (GDP) rose 3.3% annualized in the fourth quarter of 2023, exceeding consensus expectations of 2.0% and marking the sixth consecutive quarter of above trend growth. Economic strength continues to be driven by the consumer, with consumption accounting for over half of the quarterly increase and exceeding already high expectations. While consumer spending across both goods and services was robust, other areas of strength in the report include fixed investments, exports, and inventories. For calendar year 2023, the economy expanded 2.5%, far surpassing the 0.3% growth rate expected by economists at the start of last year. However, economic growth and consumption slowed from the third quarter to the fourth quarter, a trend that is likely to continue this year as higher interest rates continue to permeate the economy.

Why it matters: With interest rate cuts expected to begin this year, the market narrative is shifting away from bad news for the economy is good news for the equity market to a backdrop where good news for the economy is good news for equities. Provided inflation continues its expected decline, positive economic news can also be positive for equity markets given that the fear of higher-for-longer interest rates has dissipated from the market following the Federal Reserve’s more dovish stance.

The market particularly reacted to the price indicators of the GDP report, with the core price index rising 2.0% and the headline price index increasing 1.5%. The continued disinflationary environment is an encouraging sign for the Federal Reserve to begin easing, though interest rate cuts are more likely to begin in the second quarter. It is important to note that GDP is a backward-looking metric, and we do expect economic growth to slow this year as consumer spending cools and high interest rates hamper economic activity. Given the expectation for growth to slow, Bessemer portfolios are underweight more cyclically oriented sectors of the market.

U.S. Primary Season Appears to End Early, Ushering in a Prolonged General Election

What is happening: Ron DeSantis’ decision to end his campaign and Nikki Haley’s loss in New Hampshire appear set to end the U.S. primary election and usher in a prolonged general election season. Absent a health or legal issue, the 2024 U.S. election is nearly certain to see a rematch of current President Biden and former President Trump.

Why it matters: With former President Trump the presumptive nominee for the Republican party, the general election comes increasingly into focus for investors. As it pertains to which candidate is most likely to win in November, we will be closely watching how the economy fares over the next nine months. We note that every president who has avoided a recession in the two years prior to reelection has gone on to win reelection; meanwhile, every president who experienced a recession during those years, lost reelection.

Regardless of the presidential outcome, it is unlikely that either candidate will have a governing majority in the Senate, and therefore, broad changes to policy would be largely limited to executive action, reconciliation, and areas of bipartisan support. While election season is likely to bring noisy headlines and potential market volatility, we remain focused on the policies that are both likely to be implemented and could have tangible market impacts on specific stocks or sectors. We discuss those and other thoughts on policy, geopolitics, and elections, in our recent Investment Insights.