Wealth In Overdrive Podcast

Andrew Updyke - Top Economist Updates Current Economic Forecast 2022

May 27, 2022 Hari Luker Episode 11
Wealth In Overdrive Podcast
Andrew Updyke - Top Economist Updates Current Economic Forecast 2022
Show Notes Transcript

Andrew Updyke CFA, MBA joins us today representing Westbusys economic team.

Andrew and Westbury have been quoted by Bloomberg for many years as the countries leading economic resource. Also recommended by most financial advisors in the country as the most read and most shared economic content.

Andrew shares his insight as we have clients coming to us daily with concerns about the current economic situation as we see violence and volatility in the markets

Phil Bodine interviews Andrew and they discuss market volatility and the state of the country's national debt. Areas to be concerned and areas that are being blown out of proportion with no need for concern. Some will surprise you!

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Connect with us:
https://www.philbodine.com
https://www.linkedin.com/in/hariluker/
https://www.linkedin.com/in/philbodine/

Speaker 1:

Hello, clients and friends. We're glad that you can join us for this podcast. Uh, today. Uh, I, I would say in the last two to three weeks, we've had several clients call into our office. Uh, they're worried about the volatility in the market. They're worried about the violence. Uh, they're concerned of what's happening in their 401ks. There there're a lot of uncertainty going on right now. And so who would I ever think of, uh, to, to bring on as an expert to help calm the nerves, ease the pain of what's going on, uh, in the economy today. First guy that comes to mind is Andrew Updyke. He's a CFA, which in our field is the highly accredited, uh, sought after credential. I it's one of the toughest credentials to, to get in our industry, a certified financial analyst, uh, he's with Westbury, um, economics team and Bloomberg, uh, rates that team as the top forecasting team in the country. And so who better to have us on today's, uh, podcast than Andrew and Andrew I'm. I'm gonna let you take it away, please. If you would just map out, uh, from our clients, what you see from your, your perspective what's going on in the market, the economy or debt structure. And, uh, I I'm, I'm gonna turn it over to you. Thank you. Thank you for joining us.

Speaker 2:

Yeah, absolutely. Well, thank you for having me on and you know, it's, it's interesting to me, you mentioned we we've been ranked consistently by Bloomberg's one of the top forecasting teams in the country. And a lot of times I get the question what's led to the consistency. Why have you guys had the track record that you had? And what I keep going back to is because we let math do the talking and there's a lot of times, and we're seeing it right now, where emotion starts to run high, and we can see these, these emotional disconnects and listen, I understand why this takes place. If you turn on the TV, if you turn on the radio, if you open the newspaper and now over the last 10, 20 years, if you pull out your cell phone, you are inundated with negativity, right? The news in good times and bad is, is always negative. The goal there is to sell advertising. They know that humans are loss averse. It keeps our attention, but at the end of the day, math wins out. And I'll tell you some of the times the math is not that exciting, but it gives us an idea on where we stand. And looking back to history, kind of gives us some ideas on where we're going. So that's what I wanna do today is walk you through what we're seeing right now and what we think that, that, that suggests about the remainder of this year. Now, I don't have a crystal ball. I, I actually, we do have crystal balls that we've won for forecasting. They don't work. I've tried it, but, you know, let me remind you, let me start by reminding you that coming into 2022, it was gonna be a more difficult year, right? Because we were coming off of 20, 20 and 2021, a time period where we had five and a half trillion dollars of additional money coming into the system, adding to economic spending, right? It lifted GDP were coming off of 2021 where the us saw kind of a big boost from the reopening process last year, in fact, was the single fastest year of output growth that the us has seen since 1984. And then we came into this year with multi decade high inflation. It was at about 7% now, you know, those factors, it didn't mean we weren't gonna grow this year, but it meant that we were gonna grow slower than we did in 2021. Now we get the escalations, we get Russia, Ukraine, we get China and the zero COVID policy adding to issues with the supply chains. You get the fed, being more aggressive with dealing with inflation, raising rates faster. And all of those things have added to volatility. All of those things have heightened emotions. And one quote that I've heard a lot this year, people bring it up is the famous Mike Tyson quote. And the, the quote is everyone has a plan until they get punched in the mouth and Tyson. At the time, what he was saying is, look, you can have plans on how you're gonna go into a match. You can have a plan on what you're gonna do when things get tough. But when push comes to shove, when that adversity really comes in in things often take over, right? We, we fear kicks in and, and all of our best laid plans go out the window. The thing that I think is most interesting about that quote is that at the time he was talking about Vander Holyfield, this is 96. Uh, Tyson is a heavy, heavy, favorite to win this fight against demander, holy field. And holy field said, I got a plan. I'm gonna work, Mike, and we're gonna slow him down. Tyson says this quote, but holy field won the fight, right? Because at the end of the day, he stuck to the plan when the body shot started coming, when the upper cut started coming, he stuck with the plan and that plan ultimately led to victory. And I think that's a great analogy for this year because the, the fist of fur are fly in the markets. It has been a turbulent year. It's been an emotionally painful year, but I think that the plans we had in place going into this year, the fundamentals that we look at, you know, suggest sticking to that plan is gonna reward you over time. What are those fundamentals? Okay. Economic growth is continuing here in the us economy. There was a report. First quarter GDP was a negative number. It was down about one and a half percent inflation adjusted with inflation spending was still positive. And this got a lot of people worried. This is what really amplified the recession word in the media. But when you dive underneath the details, when you take that report and go past the first page and you look at pages 2, 3, 4, 5, 6 into the appendix, what you saw is it was heavily related to what was happening on two fronts, one trait, because in the first quarter, Omicron, the us was opening up substantially faster. We are further along on that COVID recovery process. It had more of an effect on emerging markets. It had more of an effect in some of the places like Europe. Now that's reversing itself. As we go into the second quarter, this has already been it's already at this point, less of a headwind factor in Q2. The other major thing that came through was inventories. Okay. Inventories were a, a drag on growth in the first quarter. Now, initially, that, that sounds bad, right? It sounds like it's a negative cuz people said, well, does that mean that companies are not investing in products? Do they not believe that consumer strength is gonna be there? And the answer to that is, is no. Actually what happened was there was a huge boost to inventories in the fourth quarter of last year. So the first quarter of this year was slower because deliveries that were expected to take place in January actually took place in December. The Q4 print from last year was an incredibly strong GDP number. We got a bit of a balancing out in Q1. The federal reserve had their meeting a week after the GDP. The first number came out. Okay. And there was a question that was asked of them. They said, uh, you know, can you really be raising interest rates? Can you really be combating inflation in this type of environment? And what the fed said is, look what drives GDP over time? What drives growth over time? It's fundamentally what's going on with the consumer what's going on with businesses. And when you look at those two components of GDP consumption and business investment, the first quarter was actually one of the strongest quarters that we have seen in quite some time. It was these temporary, typically volatile factors that have moved that headline print, but consumers and businesses are what drive us forward. Now consumption today. This is an incredible thing. When you, you step back and think about it after the financial crisis, it took us about two years for consumption purchases in the economy to get back and start setting new highs. Today, we are about 29% above where we were pre COVID. We had closed the gap. We started setting new highs in 2020. Then in 2021, we saw some significant growth activity take place. Now some of that was related to the checks that came through that's stimulus that was supporting economic growth. And people said, well, maybe that's it's sugar high. Then this is temporary. And we're about to see consumers pull back. But when I talk with the banks and I have a lot of conversation with the banks, they said, that's not what we're seeing. When we look at their accounts, they did spend money. They did put money to work from those checks, but they also made some substantial progress on the debt front, uh, during COVID they pay down credit card debt. That's now come back and started to rise again. But the number they look at is called the obligations ratio. It's kind of a fancy economic speak. What it's saying is how much of your after tax income, okay. The money that hits accounts is going back out to pay for the house is going back out to pay for the cars, going back out, to pay for credit card debt, right? It's it's basically saying, how levered are you? How at risk are you? If there's a slow down in the economy, are you at risk of, of, you know, defaulting on payments? That number today is at the healthiest level that we have seen since at least 1980, which is when the data started being recorded. Okay. So the banks say, man, our clients have never looked better. Businesses have strong balance sheets today. When, when asked in a lot of their earnings calls, they said, it's hard to see the recession when the consumer is this strong. Now it's not just that they improve this debt balance sheet. They also have built up significant cash balances, checking account balances in the United States right now are up two to 3 trillion over the last 18 to 20 months. And to put that number in some perspective, that number stood total checking account balances were at about 1 trillion when all this started. So we are now two, three times that, uh, and, and, and consumers, they're worried. They're still nervous. They're still, uh, they, we don't know exactly what the future's gonna hold. And they see what if, what if Russia, Ukraine escalates? What if China invades, Taiwan? What if the fed does hike us into a recession? And so with that, they've been a little bit more cautious about bringing money to work, but at the same time, they are still spending. Now they're shifting a bit, they're starting to shift from goods towards services. You, you see it, you, you hear it from Walmart, you hear it from target. These companies are saying, Hey, you know, people are, are still buying. Sales are still up, but, but we're starting to see shifts from we're buying lawn furniture to B we're buying luggage. And I travel just about every week. I do about a hundred flights a year. I visit about a hundred cities per year. And I will tell you that over the last six to nine months, the explosion in activity at the airports at the hotels at the rental car centers is clearly visible. So that's gonna show up and, and you're gonna hear some news about a slowdown at, you know, X, Y, Z retailer. But if you step back and you look at the broader activity, what you see is that consumption continues to move forward. Now, inflation, it remains an issue. And the main reason for this, uh, is, is not. And I'll tell you, if you turn on the TV, I'm sure you've heard about supply chains. I'm sure you've heard about employment. I don't know if you heard that last year was the single best year for employment gains in us history. I don't know if you've heard that in the first four months of this year, we've already added close to 2.1 million jobs to the us economy, which is about what we would do in a calendar year. Going back to 2015, 16, 17, 18 jobs are coming back at a rapid pace. I think we will add four to 5 million jobs to the economy this year. And that too is supporting economic growth. These are hands at work, hands producing that production directly flows into GDP. These are hands at work, hands producing that are getting paychecks, which is sustainable spending power into the future. We at the end of this year should be up in terms of the total number of people working in the us economy after losing 22.4 million workers in two months time in March and April of 2020, by the end of this year, we should be back and slightly above. Uh, it's it's, it's not a boom in employment. I wish we were higher. I think there that we're gonna continue to see some tailwinds pushing us higher as we move through this year, as we move into next year. But those healthy job gigs, that business investment that is taking place, the consumption from healthy consumers, all of that supports economic activity. And I think this year GDP growth, it's not gonna be five and a half, like it was last year, but I would expect something in about the 2% range, two to 3%, which is healthy. It's progress. Now, as the fed tightens, as the fed keeps raising interest rates, this is what people are worried about. The fed has ruined the party, uh, at times in the past, by over tightening that, and, and, and this is possible. I'm not gonna, I, I'm not gonna say that we won't see a recession in 2023 or in 2024. I think they're tightening, but they're not yet tight enough to stop activity. And we continue to see that with companies, the business investment side of the equation, whether that's first quarter GDP or the numbers we get from things like the durable goods reports, show companies are putting this money to work and they're putting it to work, uh, uh, successfully. If we look at earnings, if we think about the lifeblood of the markets over time, the driver of the, the value from markets over time earnings have made substantial progress. Unlike the financial crisis, they, after the financial crisis, it took us five years for earnings to come back and set a new high. This time we saw the decline in 2020, but in 2021 earnings ended the year at about$200 per share in 2019 before COVID, they were at about$160 per share earnings rose, roughly 30% from 2019 to 2021. And the estimates this year are that earnings are gonna grow about another 10% that next year they're gonna grow about 8%. Okay. So there, there's this disconnect that I'm seeing. When I dive into the data, when I look at what's happening with consumers, when I look at what businesses are doing, when I look at the earnings growth that's taking place, and then I look at the market reaction and I see the fear, I, I see the negativity. I see the concern. We play a lot of, I I'm hearing a lot of investors talk about those what ifs, but that's, that's not new. We do the, what if game, every time the market starts to rise because we are risk averse loss, averse people, fear is a more powerful emotion than, than almost anything else. Okay. And that's why to, to bring it all kind of back. I think we need to have a plan. I think we need to have a strategy of finding the data, looking at the information that can tell us what's really taking place. It's less exciting. It's less sensational, but emotions have been a terrible gauge, a terrible guide to investment decision making over time. We're gonna keep going back to the numbers. We are gonna keep going back to the fundamentals because while that emotion can win today, this week, this month, the math wins out over time. So ultimately my view right now, the economy's gonna continue to grow in 2022, a modest pace, not as fast as last year, but led by jobs led by consumers, led by business investment. I think the markets are gonna get past this wall of worries. We get into the summer as they see the data continuing to come in. I think the markets should move higher. I think the markets right now are undervalued. Uh, but I, I don't have a crystal ball to tell you exactly when that's gonna take place. I can't time the market. I don't know anybody who can time the market. So the ultimate question is, is now a good time to be in the market. And I think it's with that. Why don't I pass things back to you, Phil?

Speaker 1:

Wow. What kind of like the Energizer bunny? I just wound you up and let you go.<laugh> um, just, you know, in, in order for us to keep our clients emotions in check, cuz you, you talked about emotions. Uh, you talked about volatility. Um, there's you did talk about recession. Uh, you don't see all the dashboards that you see around you and all the indicators, your, uh, I, the S and P 500 index over the last seven has managed to decline the last seven weeks in a row. Mm-hmm<affirmative> uh, bond market is screaming recession. The last two months in a row. Are, is that perhaps what we're going to see here towards the end of the year, if not into next year is recession. Yeah, it,

Speaker 2:

Uh, I mean, that's certainly what they're gonna be worried about, but let's, let's think about the markets for a second because it's not unusual. It's actually pretty common that the market can see pullbacks of 10, 12, 14%. Let me give you, let me give you the NASDAQ for example, cause the NASDAQ has gotten absolutely hammered this year. The NASDAQ came into existence in 1971. It's been in existence for 51 years. How many times in those 51 years has the NASDAQ pulled back by 10% or more? The answer is 66 times. It happens roughly every 11 months. Now at that 66 pullbacks, have we had 66 recessions during that timeframe? No. Have we been concerned about recessions almost every single year? And the answer to that is is yes. There's almost always a reason to be concerned. You can find it. If you look hard enough, we can bring out again those what ifs and the market, because we had a strong 20, 21, uh, we had a strong second half of 2020. The, the, the markets get nervous when things go well, they think, okay, this must be you. You can't, you can't move forward without any friction. And that friction is showing up. But I think the emotions and war, I mean, I'll tell you when, when Russia invaded Ukraine, I had a hard time sleeping that night. I, I was sitting down, I was watching it in, in my family room and I've got a seven year old and I've got a four year old sleeping upstairs. And all I can think about is these families, right? These families that, that are in Ukraine that want absolutely nothing to do with this, my emotions were, were absolutely elevated. Right? And then when you, you, you hear a about other conflicts that are going on, right? It, it, it ramps up our emotions. And so when, when we're fearful to begin with, we're much more susceptible to hearing negative information. That's why for us, it's a tricky thing to do. But our jobs when we come in is to put on the analyst hat to say, okay, I feel bad. I, I, I don't like what I'm seeing around me, but is there something fundamental driving this? Does the data suggest that this is warranted? Does data suggest this is gonna continue? Or does history does the data suggest this is a temporary factor? And when we continue to watch our dashboard, we watch those fundamentals. Uh, for example, that business and investment. When I look at it on a GDP standpoint, uh, we we've had periods where the headline number in GDP declines, but this core component moves up. We've had it happen 18 times. Uh, since the 1950s in five of those occurrences, five of the 18, we actually saw a recession eventually, which means that in two thirds of the time, a little more than two thirds, we didn't go into a recession. We, we, we saw those temporary volatile factors that ultimately correct themselves and we continue to move forward. And I think that's the most likely case that we're in today.

Speaker 1:

Wow. Um, well I, if I can interpret what you've said here in the last 20, 25 minutes. Thank you, Andrew. Uh, stick to the plan.<laugh> yes. Uh, call your advisors, talk to your advisors, talk through it. Uh, don't don't get immersed in your emotions and uh, if you have questions, I'm Andrew, I'm just gonna give them your, your private cell phone number and they can call you right.<laugh>

Speaker 2:

I'm gonna have that auto forward to you.

Speaker 1:

Okay, great. Great. Now, Andrew, such a pleasure. Um, so grateful for your time today. Um, I know you get inundated by calls. You chose to pick up the phone for us. We're we're so grateful that you, uh, chose to, uh, spend at least a little bit of time with us today and give us updates. Thanks for calm. It, not only my clients' nerves, my nerves, our emotions, and remember, stick to the plan, look at the data. And if you have questions, just call Andrew

Speaker 2:

<laugh>. Yeah. Thank you so much, Phil. I will say, you know, here's, let me, let me end with, with, with saying one thing is, you know, we're one of many resources that Phil has at his disposal. We, I get to have this conversation with Phil on an ongoing basis. Right. But if you, if, if fear is running high, if you see something that concerns you reach out to him, right? Because he's got a whole team behind him to dig into the data, to look back at history, to try to put things into context. If we can be a resource in doing that, we're very happy to do it. Phil, thank you for all the work that you do with your clients and thanks for having me on today.

Speaker 1:

Yeah. Thanks Andrew. Again, we're grateful for your time and, and thank you again. Appreciate you. Appreciate you today. Thank you.

Speaker 2:

Thank

Speaker 1:

You.