Weekly Reflection for February 16, 2024

The Week - An Update in Charts

Stocks and bonds sold off hard on Wednesday after newly-released inflation data stoked fear that the Federal Reserve would not cut rates in March. To be fair, the Fed has never said it would cut rates in March. After the drama subsided, prices moved to recover some of the losses.

How expensive are stocks anyway? Using a series of five charts, The Wall Street Journal worked to tell a story of the S&P 500 Index as having plenty of momentum but somewhat expensive as a group. Here is one chart to review with a second is below.

The equity risk premium compares stocks to bonds and tries to determine if it is unusually risky to hold stocks instead of bonds. Both lines, which use different variables, show the lowest ratio in twenty years; the lower the ratio is, the more expensive stocks are to the relatively more attractive bonds.

The CAPE ratio shows the price-to-earnings ratio, adjusting for inflation, over a 10-year period. It looks to smooth out anomalies and other blips that happen in economic cycles. The S&P 500 Index appears highly valued although not as steep as the recent peak in October 2021.

Manufacturing production may have bottomed out already in the E.U., based on a turnaround seen in demand for goods. This comes as signs in Britain and Japan point to their economies falling into recession.

This year interest due on government bonds will exceed the government's outlays for defense spending. As our government borrows more and more, a trend that picked up sharply with Covid-relief projects, the interest on our debt will be over $1 trillion by 2026, per the The Wall Street Journal calculations.

Nearly the entire labor pool is tapped for jobs. Less than 4% of Americans say that they cannot find a job today, which is a very low percentage and so good, the U.S. basically gets an A+ for employment. But employers are still struggling. There are 9 million job openings, nearly twice as many as a decade ago. Blame our low birth rate, a broken immigration system and 10,000 baby boomers reaching retirement age every day. With a changing talent pool, employers are becoming more flexible on hiring non-degreed workers for jobs which previously required one.

Gratefully, we haven’t lost all sense of decorum in the world of virtual relationships. Most Americans still find it unacceptable to drink alcohol, get high, have the TV or other noise competing in the background or be dressed (at least visibly) in an unprofessional manner during a work video call. Working from home is showing no signs of going away and norms for behavior still should be held high if your home is the office. No mention here of whether wearing slippers or having your dog nearby is a no-no.

World Election Season is Epic in 2024

By calling the elections happening this year "epic" we mean there will be many and they will shape our world for years to come. In January, Taiwan elected Lai Ching-te (also known as William Lai) as their new president, giving his democratic party a third consecutive term in the presidential seat. His party is in favor of continued definitive independence from China. Taiwan held what was also the first of many consequential elections around the world taking place this year.

Some 76 countries and 4 billion people are eligible to cast a vote in 2024, the most ever in history. Casting a vote does not equate to what we consider as free and fair elections in many of these events.

Take Russia, which sends voters to the polls next month. Whatever the result (hint: Vladimir Putin will be reelected as president) is preordained by a system that kills competition, literally at times, and rewards cronies. Per the EIU, a research and analysis division aligned with the publisher of The Economist, Russia’s election sham is only a hair better than that of North Korea, which is expected to hold its election next month also. There is no pretense in either country of legitimate candidates,

any discussion of policy or real choice for their voting citizens. What we can expect is the same old government after the election and some stagedpropaganda photo ops for the people.

Elections in Mexico and Pakistan, countries with governments that blend democracy and some elements of authoritarianism, are shady on the “free and fair” aspect. Lest we pat ourselves on the back too soon, The Economist reports that while the U.S. has free, fair and open elections and processes, the underlying political system is flawed.

The EIU considers five aspects of democracy —electoral process and pluralism; functioning of government; political participation; political culture; and civil liberties. America’s loses a lot of points for political culture.

The electoral outcomes this year will shape the global economy in ways that matter to markets, even though investors claim that they have no meaningful impact on security prices. Elections will impact how many countries continue their shift towards closer relations to China and Russia versus the U.S. and Europe. Some, like India, Mexico and the African continent, are playing nice with all sides.

Mexico is particularly important to the U.S., which has greatly benefited from factories moving to our southern neighbor as near-shoring has become more important in the last few years. But it is not just American or American-friendly companies that are making the shift. Chinese companies are already making the same move, or considering it, like BYD, the Chinese car maker that just surpassed Tesla in electric vehicle sales in the U.S. This gives Mexico more incentive to stay close to China.

South Africa has a struggling economy and for the first time in over 30 years, the African National Congress could lose its majority. The European Union’s 27 member countries will elect a new parliament. There are no major shifts expected although the “center” may get smaller and more far-right candidates may win a seat. The governing focus will likely remain on balancing budgets, controlling spending and immigration.

For more colorful charts, if you want to follow along on the state of democracyin the world, visit the EIU's democracy index here.