Turkey Dinner Deflation, Soft Landings, and Onshoring Opportunities, Terry Gardner, C.J.L.12.6.23

 

In this video, Terry Gardner talks about the post-Thanksgiving market, covering inflation’s impact on holiday meals, the broader economic landscape of rates, inflation, and growth, and explores promising sectors like industrials for 2024 earnings potential.

Hi everyone, it’s Terry Gardner from CJ Lawrence, coming to you from Midtown Manhattan. It’s Wednesday, December 6th. I’ve got some brief market commentary for you today. I’ve got four points that I want to cover. First, I want to take a look at the inflation at the Thanksgiving dinner table, something we covered as a preview in previous years. We’re doing a review this year. Secondly, we want to take stock of where we are in the broader economy with regard to interest rates, inflation, and growth. And then, thirdly, let’s take a look at earnings, see where they’ve come in for the third quarter, and what the outlook has in store for 2024. And then, finally, we want to highlight a couple of sectors where we think the earnings growth potential for next year looks particularly attractive.  We want to highlight, specifically, the industrial sector. 

First off, Thanksgiving dinner. I hope everyone had a great Thanksgiving.  In past years, we have always previewed the American Farm Bureau study of inflation at the Thanksgiving table. Every year, they do a study and compare prices of a basket of items that are consistent over time. They’ve been doing this for decades. If you remember, when we did this last year, we noted that the Thanksgiving dinner cost was up 22% in 2022 versus 2021. We’re really catching an inflation drift there. This year, that’s reversed itself a little bit. This year’s Thanksgiving dinner, thankfully, was down about 4.5% from last year’s peak. There are a couple of items worth noting because we always like to see what the menu has in store and where the inflation and the disinflation lie. The turkey cost you 5.6% less this year, which is actually a particularly good year for the turkey flock. 

There are a couple of other items that I found interesting.  The big decliner for the year was cranberries, which were down 18.3% – thanks to all of our friends in the cranberry bog up there in Massachusetts.  The big increases were pumpkin pie mix and sweet potatoes. 

We will parlay that into discussion point number two on inflation, interest rates and growth and what the forecast looks like for next year. Interestingly enough, core inflation has been coming down, still relatively high versus historical levels, but coming down nonetheless. It is now looking like there is consensus on FactSet. You could probably use other sources of consensus, but I think they’re all kind of around the same area. Whether you use Cap IQ or Bloomberg, the FactSet consensus for next year’s core inflation is 2.9%. That is coming down quite dramatically from where we’ve been over the last year or two. Likewise, the 10-year Treasury bond yield outlook for next year has declined 4%, which was up around 4 ½%.

Core inflation and treasury yields are coming down.  Finally, let’s discuss real GDP expectations. Adjusting for inflation, it will be only 1.2% for next year. If you believe the consensus that we’re seeing for most of the service providers on financial data, the consensus is that we’re expecting a soft landing for next year. What does that actually mean? When you think about soft landing, you can think about going down a slide when you were a kid.  At the bottom, it either steepened and there was a big drop-off at the end, or it graduated and flattened out, and it was a nice, easy soft landing.  That is what the expectation is –  people getting hurt on hard landings. We’re hoping for a soft landing. 

Thirdly, let’s take a look at what earnings look like for next year in a soft landing environment.  Actually, that picture is brighter than the outlook for GDP and the economic forecast.

Looking at S&P earnings for 2024, expectations, according to FactSet, are that S&P 500 earnings will grow by about 11.5%. There are a couple of sectors, to our third point that I wanted to note, where we are seeing strong growth next year and saw strong growth this year. With two years of back-to-back double-digit earnings growth, you can usually find some winners in those sectors. First off would be the communication services sector. Secondly, consumer discretionary, both with back-to-back double-digit earnings growth years. And then, finally, I want to note the industrial sector.  It has been a  little bit of a sleeper, with no big up or down years. 11.5% growth this year, 11.5% growth expected for next year. Technology had a softer year this year but is expected to re-accelerate growth by 16% next year. These are a couple of sectors where you can find some opportunities for appreciation.

Now on to our fourth and final point.  The reason I was highlighting industrials was because we think that there are some real opportunities within that sector, not necessarily tied to economic activity, accelerating or decelerating, but based on secular tailwinds in the economy driven by onshoring and reshoring. As we’ve seen over the last couple of years, U.S. companies that have moved abroad are continuing to move their manufacturing capacity back to the United States or launch new capacity in the United States, whether onshoring or reshoring. And the number of companies that are announcing reshoring or onshoring initiatives is at an all-time high. You don’t often pick this up in the economic data that’s released by the Census Bureau and others. According to the Federal Reserve Bank of St. Louis, who tracks US manufacturing and construction spending, for the first time, that figure is now over 200 billion dollars on an annualized run rate basis.

That tells you, and again, that’s not data that’s captured in capacity utilization or industrial production figures. This is the new construction of manufacturing facilities. We think that is tied into the initiatives around reshoring and onshoring. An additional catalyst to this construction spending is certainly private investment, but a lot of public incentive programs as well – whether it’s manufacturing tax credits that companies receive; the CHIPS Act, which was passed; or the Inflation Reduction Act, which has a lot of incentives in there for manufacturing capacity. There’s a real package of incentives at the federal, state, and local levels for manufacturers to grow and to initiate new projects here in the U.S..  Much of that new manufacturing capacity is being fueled by automation and robotics. What is happening is the labor cost advantage for overseas manufacturing is disappearing — whereby companies used to have to go overseas to try to gain an advantage and lower their manufacturing costs, automation and robotics are allowing them to manufacture here in the U.S. at a competitive rate with manufacturing overseas.  That is another important catalyst to the growth in manufacturing here in the U.S..  

In addition, it is important to note access to cheap energy. We’ve read plenty and heard plenty about how expensive high energy costs are in other OECD countries around the world on a relative basis. In the United States, U.S. manufacturers have a cost advantage in terms of energy costs.  Of course, having access to the largest consumer economy in the world is attractive to manufacturers seeking to build new plants and reshore existing operations. 

To summarize, the consensus is for a soft landing in the economy. We will be watching to see if there’s any deviation from those expectations. Earnings expectations are for double-digit growth for next year for the S&P 500, 11.5%. That’s pretty robust. And again, finally, we see some really interesting opportunities in the industrial sector, which is the industrial sector which is showing nice steady double-digit growth, particularly with companies that are experiencing the secular tailwinds of onshoring and reshoring. If you’ve got any questions about that, give me a call or shoot me an email. I look forward to hearing from you. Thanks.

 

Related Posts