Why the Bull Market Should Continue in '24

Why a Productivity Boom could be the secret ingredient

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If you were focused on so-called Leading Economic Indicators last year, you’d have been forgiven for thinking we were about to tip into a recession or that we were already in one. These surveys and data points were highly misleading, and, as a result, many people were highly misled.

But not Ryan Detrick. He had his eye on the right mix of charts, stats and wisdom from market history. The things he was following told him in December of 2022 that the consensus was wrong and the stock market was about to recover. And people were really upset every time he said something constructive. His tweets were greeted with a panoply of rage and incredulousness, the entire way up.

Ryan stuck to his guns throughout and the people who listened to what he was saying were better off than those who had scoffed at him.

What had he been paying attention to instead of the classical leading indicators? Certainly not the inverted yield curve and definitely not the ISM survey.

In a Consumer-Driven Economy, Watch the Consumer

No, Ryan was looking at stock prices, employment and wages. We have an economy that is approximately 70% consumer spending-oriented, so starting with the financial health of that consumer was probably a better place than starting with the opinion of a purchasing manager at a lightbulb factory. Ryan’s work suggested it would be highly unlikely to experience a severe stock market downturn and accompanying recession while employment remained bountiful and wages were rising at a faster pace than inflation.

Here’s one of his charts looking at the inflation-adjusted wages being paid to rank-and-file working Americans through the end of last year (green line):

The green people are the folks whose increased wages immediately turn into increased spending in the “real” economy. They don’t put their salaries into Treasury bond ETFs the way C-level employees might. They literally use the money to buy the things they want and the services they need.

The post-pandemic period has seen a reversal of fortune for the managerial class versus the working class. It turns out working people are more highly coveted by employers these days than the the types of employees who are paid to oversee them. Software is great, systems are great, tech is great, but someone has to actually climb up into the truck cab and drive the shit to where it has to go. Someone else has to unload it, package it, label it and drop it down the right chute. There weren’t enough people to do these things and that’s what you’re seeing in the chart above. The typical consumer has been extremely employed and highly compensated. Ryan, a Cincinnati-native who is very in touch with his own midwestern-ness, understood this idea better than many of his counterparts on the coasts. Guys in Manhattan think you click the buy button on a website and a magic genie pulls that Loro Piana cashmere quarter-zip out of his own blue ass.

The 2024 Outlook

So if that insight ended up being one of the keys to getting 2023 right, what should we be looking for this year to tell us things could remain on the right track?

Ryan points to a situation wherein we’ve just created 8 million jobs, the quit rate has calmed itself down, the layoffs we’re hearing about in blaring newspaper headlines are not even close to showing up in the official data, and wages are still growing in excess of the rising cost of living. If inflation can remain muted enough, we could end up with one of the all-time great ingredients for an economic expansion: A productivity boom. It’s been awhile since we’ve seen one of those.

In plain English, productivity occurs when the economy is growing but the cost of running a business is growing more slowly. Employees become better at their jobs and require less ongoing management, training and supervision. Investments in technology start to pay for themselves in the form of high efficiency and rising revenue per worker.

Here’s a chart from Ryan and his colleague at Carson Wealth, Sonu Varghese:

As you can see, the great bull markets of our lifetime are typically accompanied by rising productivity.

What could spoil it? My best guess is a re-acceleration in shelter costs or a resumption of the wage-price spiral. Those would scare the Federal Reserve into remaining tighter throughout the rest of the year. Or, worse, changing their rhetoric and reintroducing the potential for more hikes. I see this as a very remote possibility. I think the productivity story makes more sense.

The One With Ryan Detrick

On an all new episode of The Compound and Friends, Ryan lays out the case for why stocks should continue to rally in 2024. We get into sentiment, seasonality, the Presidential cycle, earnings, AI and everything else on the market’s mind. You can listen at the link below or wherever fine podcasts are played.

The full episode will hit our YouTube channel tonight.

Hope you’ve had an awesome week. Talk soon! - Josh