Manulife Inves… - Fri, 02/16/2024 - 13:59

The resilient U.S. economy puts stocks on solid footing

The U.S. economy’s resilience amid a high-rate environment is likely to provide a durable catalyst for stocks for the rest of 2024. We explore stock selection ideas in industries where we see the most attractive opportunities in an economy driven by robust and sustainable consumer spending, a healthy banking system, and positive housing market trends. Each of these strengths is likely to become more pronounced given the likelihood of interest-rate cuts later this year, in our view.

While we remain alert to signs of any potential setback in the wake of the U.S. Federal Reserve’s (Fed’s) aggressive interest-rate hikes dating to March 2022, we’ve been among those who continue to believe that the economy will avoid a hard-landing recession—a view that’s been borne out by early 2024 data. With modest rate cuts now appearing to be likely in coming months, it appears that the Fed has succeeded in orchestrating a soft landing while putting inflation on a downward trajectory; any economic deceleration is likely to be shallow and short-lived, in our view.  Retail spending has held up well in recent months, indicating that consumers have managed to adjust to the higher borrowing costs resulting from the Fed’s hikes. Businesses also appear to have adapted to higher rates and the labor market has remained solid, with jobs growth exceeding consensus expectations.

Through the rest of 2024, we expect that the economy’s overall trajectory will pick up, driven by a resilient consumer, stable rates, and renewed business confidence. Against this backdrop, we may see an elevated level of economic uncertainty—as well as bouts of market volatility—in a year of heightened geopolitical risks and key elections in the United States and several other major economies.

Key industries to watch through the rest of 2024

While such an environment presents challenges, we believe that it’s well suited to active, bottom-up investment managers who seek to identify opportunities such as security mispricings. A disciplined approach to valuation can be critically important in times like these and, with an eye on this year’s earnings trends, we’re focusing much of our attention on these key industries, where we see an abundance of opportunities:

  • Homebuilders—This market segment has held up relatively well in our view, considering the negative impact that high mortgage rates have had on home sales and orders for homebuilders. After peaking last October and November, mortgage rates have declined in anticipation of pending rate cuts, which we believe will provide the needed catalyst for prospective homebuyers who have been waiting to get off the sidelines. For builders, we see especially strong growth potential in the many local markets with shortages of affordable housing; many of these markets are starving for more supply. We’ve identified selected builders with strong business fundamentals, such as long-term records of generating steady revenue growth and resilient books of new home orders, even amid the rising inflation and rates of the past couple of years. Some of these names have recently traded at low valuations, providing what we consider to be a margin of safety from an investment perspective when combined with these stocks’ other strengths.   

Mortgage rates began falling in late 2023 in anticipation of lower interest rates

30-year fixed-rate mortgage average and the federal funds effective rate, January 2020–January 2024 (%)


Source: U.S. Federal Reserve, Freddie Mac, February 2024. Past performance does not guarantee future results.

  • Banks—The banking industry’s growth potential is also tied to the downward trajectory that we believe is ahead for interest rates and the resulting positive impact on mortgage lending activity. While early 2023 saw a small number of banks fail amid a liquidity crunch triggered in part by high rates, those setbacks were limited to a few regional institutions in niche markets. Overall, banks have remained well capitalized, as evidenced by findings from the latest round of annual stress tests conducted by the Fed. For example, all 23 banks required to take the 2023 exam fared better than they had the previous year, with each institution remaining above its minimum capital requirements during a hypothetical recessionary environment. We believe that the industry’s overall health is vastly improved from the state of affairs some 15 years ago, when a global financial crisis—the catalyst that led to the U.S. regulatory requirement mandating the stress tests—was triggered by a wide range of factors, notably undercapitalized banks, an overheated housing market, and excessive consumer debt. Across today’s banking industry, capital markets-sensitive institutions that generate revenue from investment banking are our chief focus from an investment perspective. We see strong current potential for this segment owing to prospects for a rebound in initial public offerings, secondary offerings, and debt issuance following a dry spell over the past couple years.
  • E-commerce—On the growth side of the equity style spectrum, select e-commerce companies appear to us to offer attractive combinations of reasonable valuations with strong growth potential. One catalyst for this segment is the recently improved financial health of U.S. middle-class consumers, who account for a 70% share of overall retail spending.1 With wages rising faster than prices since early 2023 and rate cuts likely later this year, e-commerce companies appear to us to be well positioned to capitalize on a potential increase in discretionary spending.     

Despite risks, the U.S. consumer outlook has continued to improve

The U.S. economy does face challenges, including a recent rise in consumer debt. However, we view consumer debt loads as manageable, given the improvement in the overall finances that most Americans have experienced in recent years. For example, an October 2023 Fed survey found that American families’ real median net worth surged 37% from 2019 to 2022. Over that period, the share of families with credit card debt remained fairly stable at around 45%, and card debt balances declined. In addition, household debt service costs relative to disposable income have recently remained near the lowest recorded levels dating to 1980—although the ratio has recently edged above the record lows of 2020 and 2021, when government stimulus payments supported consumers during the COVID-19 pandemic.

Consumers' debt costs have remained near their lowest levels in decades

Household debt service costs relative to disposable income, January 1980–June 2023 (%)


Source: U.S. Federal Reserve, January 2024. Recession periods indicated are as defined by the National Bureau of Economic Research. Past performance does not guarantee future results.

Given the potential that we see for earnings growth to pick up through the rest of 2024, we believe that valuations in the three areas above and in other market segments may become more attractive in coming months. In such an environment, we see plenty of opportunities at the individual security level across the equity style spectrum, including value stocks as well as selected growth names.

Going forward, we take comfort in the ongoing health of the consumer, the strength in the job market, record cash levels on the sidelines, strong corporate profitability and balance sheets, and considerable pent-up demand and capital spending plans. We’re trying to maintain a disciplined focus on bottom-up stock picking while emphasizing financially sound companies with competitive advantages, the ability to generate substantial cash flow over sustained periods, and attractive stock prices relative to our estimates of their worth.

1 Empirical Research Partners LLC, 2024.

Important Disclosures 
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