Growth, rates and stocks: what alternatives do investors have? | Charts that Count
Amid slowing economic growth and continued rate cuts, the FT’s Robert Armstrong says investors are increasingly looking to industrial stocks as a safe haven
Produced by Greg Bobillot and Ben Marino. Edited by Donell Newkirk.
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ROB ARMSTRONG: Welcome to Charts That Count. I'm Rob Armstrong. It's been a big week for the American economy as the Federal Reserve made a big announcement, a whole series of important American companies announced their third quarter earnings, and third quarter GDP growth was announced. So today, we're going to talk about growth, rates, and stocks.
It has now become very clear that the rate of economic growth in the United States is slowing. For the third quarter, official numbers showed that the growth rate is now 1.9%, a slight slowdown from the second quarter.
And if you don't believe there is a slowdown, the Fed definitely does. After a multi-year period in which they steadily increased rates as the economy enjoyed the benefits of Trump's tax cut and recovery from the recession of a decade ago, the Fed has changed course and has now cut rates several times and indeed, just as we are recording this, has cut rates one more time to 1.75%.
What has been very striking about the slowdown is how uneven it's been. On the one hand, the consumer in the United States is strong. Unemployment is low. Consumer spending remains strong. But on the other hand, the industrial economy is floundering.
Just in the past few weeks, we've seen two companies that are generally considered bellwethers for economic growth, Texas Instruments, a semiconductor company, and Cat, a maker of great, big industrial machines, both cut their growth outlooks, both citing the effect of uncertainty among companies and investors on the global economy.
So how have stocks responded to news of a slowdown? Let's start with bank stocks. This green line is an index of US bank stock performance. And the banks have performed much as we might have expected. While the economy was growing robustly, and the Fed was increasing rates, bank stocks performed quite well.
But as we approached the end of the rate increase cycle, and rumblings of a slower economy started to be heard, bank stock performance has slacked off and has not improved since as the economy has weakened. The really interesting thing, however, is how well industrial stocks have performed even as the economy has slowed, and the Fed has backed off.
This is an index of US semiconductor stocks. One might not normally associate tiny chips with the heavy industrial part of the economy. But the fact is chips go into all the machines that businesses use. And chip stocks, as a result, are considered a strong cyclical indicator of future economic growth. Even as one of the biggest semiconductor stocks, Texas Instruments, cut guidance not long ago, the stocks have hardly taken a breath, charging upward.
So we are left with a mystery. Why is it that in a slowing economy, industrial stocks, which are supposed to be economically-sensitive, continue to roar ahead, even as the Fed issues warnings about the future, and bank stocks take fright? This is just one of many ways in which the current economic cycle has proven to be different from any of the cycles that went before it.
So it is something of an enduring mystery, but we might hazard a guess. Might it be that investors feel that given where we are and with interest rates so low-- and remember, even after the Fed's long hiking cycle, rates are still near historic lows-- might investors feel they have no choice but to own stocks and US stocks in particular?
With rates at these levels, fixed income offers very little upside. So even as the industrial economy falters, investors feel they have no choice but to stay with industrial stocks. As for bank stocks, the memory of the crisis is still fresh, which is enough to frighten them away.
So in short, the old phrase might apply. There is no alternative. So the economy slows. The Fed loosens. Bank stocks cower. And yet, economically-sensitive stocks continue to go up. We can only wait and see whether this can end well.