Forecasters remain split in their views on the US economy this year. Some are still calling for a potential recession, noting that we aren’t yet out of the waters, while others are confident we are in recovery as the Federal Reserve gears up to drive down interest rates.
But Steven Wieting, the chief investment strategist and chief economist for Citi Global Wealth, says it would take something major, like a new shock or a deliberate stance on monetary policy, to force the economy down.
Inflation was certainly severe and very troubling for markets, but ultimately its sources were transitory, Wieting said. Unlike the 1970s, which saw 14% surges in import prices and 10% money growth every year, the drivers of inflation this time were short-lived.
The price swings in different sectors were caused by temporary supply and demand imbalances. Housing struggled as various demographics relocated due to lockdowns, and shutdowns caused supply-chain shocks, all of which are normalizing. Therefore, a decline in inflation without a corresponding rise in the unemployment rate is possible.
This means inflation shouldn’t be used as a leading indicator. In fact, inflation can surprise us to the downside because some parts of the economy have a one-year lag on the consumer price index, he said. For example, new tenant rent is -4% year-over-year through the end of 2023, but the consumer price index for shelter is up 6% year-over-year. So, the biggest part of core CPI will drop over the course of the year, he added.
Investment opportunities
As for what’s highest on his list of where he sees future growth, it’s the copper sector. It’s the energy material of the future in which demand is expected to increase, and there is no substitute for it, he said. As other energy-based companies and commodities grapple with a transition to clean energy, copper is expected to reap the benefits.
The transition to clean energy and the move toward electric vehicles means demand for copper will triple by 2030, according to Citi Global Wealth’s 2024 outlook. Investors can look to copper mining companies for opportunities.
In equities, he expects the Magnificent Seven are expected to remain strong. Last year was a fantastic one for the S&P 500 after the seven mega-cap tech names returned 111%, lifting the index up by 24%. But unlike other fund managers who believe that they are now too rich, Wieting says the stocks’ gains are justified by their earnings per share, which rose 44% in Q4 and could be even higher once all earnings have been reported. In comparison, EPS came in at less than 10% at least half the time over the last decade, he said.
He believes the Magnificent Seven will be a strong part of the economy going into 2024 once again. But there is dispersion between them, and their future is more based on their own fundamentals than their group performance, he noted.
Outside of tech, the majority of industries had EPS declines last year, a trend that is expected to reverse this year, he said. Therefore, investors should look for opportunities in mid-cap growth or those within the S&P 400, the benchmark for the US mid-cap stocks. Opportunities can also be found in the S&P 600, a benchmark for US small caps.
Additionally, investors can look to companies that provide chip-making equipment that are well positioned to be the beneficiaries of artificial intelligence spending for the mag 7 and government subsidies, he added. They have lagged behind the large-cap chip makers, he noted.
Other sectors of opportunity include medical technology companies that are likely to see gains this year as medical services come back from pandemic-era slowdowns.
Finally, investors can look to industrial materials or capital goods for factories, such as parts makers for the auto industries and manufacturing equipment for consumer-facing manufacturers.
