Sand Hill's Chief Investment Officer, Brenda Vingiello, CFA, joins Jenny Harrington on “Halftime Report” to go over their most recent portfolio moves. Brenda's commentary begins
Are We in the Midst of “The Great Reset”?
Published Date : October 25, 2022
October 25, 2022
It is not unusual for the Federal Reserve Board to tighten monetary policy when the economy is perceived to be over-heated, but such action rarely coincides with a period of back-to-back, negative Gross Domestic Policy (GDP) reports. However, in the first half of 2022, the Fed did just that with a string of rate hikes while the U.S. experienced -1.6% GDP decline in Q1, followed by -0.6% in Q2. Although the negative GDP reports might have been an anomaly given statistical quirks, the Fed’s rate hikes during this weaker growth period underscored their commitment to fight inflation. The Fed has not been alone as several other central banks have also raised interest rates. Nobody wants to be blamed for triggering a recession, so what is the Fed up to? As job layoff headlines emerge, the natural inclination is to assume “here we go again.” However, with a strong job market, supportive consumer balance sheets and high levels of fiscal spending, perhaps the Fed feels they have the flexibility to drive a “Great Reset” that cools inflation without causing a deep rut in the economy.
Unfortunately, rather than apply restrictive monetary policy as inflation emerged, the Fed was late to remove the proverbial punch bowl. The aggressive nature of recent interest rate hikes is due to the need to “catch up” for lost time. It’s not news to the Fed that monetary policy works with a lag. Many studies indicate it takes from six months to two years for an economy to adjust to each interest rate hike and the first increase in this cycle was only eight months ago. Although that timeline spells the potential for weaker economic growth into and through next year, we are in somewhat of a unique period given a set of supportive cross currents.
As economies continue the transition to pre-Covid conditions, supply chains are slowly reopening, and unfilled jobs should see increased absorption all while there is an immense backlog of approved fiscal spending packages. Regarding fiscal spending, the $1.2 trillion infrastructure bill was signed into law in November of 2021 and the Inflation Reduction Act of 2022 just passed in August. These large and newly approved, long-duration spending programs in the U.S. are only just starting to kick in. Although these fiscal spending packages likely demand more material inputs, in our view, they could function as a shock absorber as they will also necessitate more labor which helps support employment levels.
So far, the job layoffs have been centered mostly in industries that were pandemic beneficiaries such as technology and mortgage-related companies. In many cases, companies over-hired to support growth which has now begun to normalize. However, the vast majority of workers in the U.S. are employed by small businesses in the service economy. It is our belief that most employers will be reluctant to cut too deep given the scarcity of skilled workers (look what happened to the airlines). Particular to this cycle, there are over 10 million unfilled job openings as of August 2022 to work through before broad layoff considerations unfold. Lastly, consumer balance sheets are very healthy, evidenced by the current average FICO credit score in the U.S. of 716, matching an all-time high going back to 2005 when FICO started tracking the scores.
Bottom line, although an economic reset is uncomfortable, perhaps the Fed recognizes that the economy has some supportive tailwinds which will ease the economic shift caused by their blunt tools. Positive aspects to the aggressive pace of rate hikes are that savers are now earning a return on their cash, and should the Fed go too far, they now have room to cut rates if needed to reinvigorate the economy.
Sources:
https://money.com/average-credit-score-record-high
https://www.fico.com/en/newsroom/average-u-s-fico-score-remains-steady-716
https://www.cnbc.com/2022/08/30/credit-scores-are-at-an-all-time-high-despite-rising-consumer-debt.html
Articles and Commentary
Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
Video Presentations
All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
Recent Posts
