Meditations on the US Stock Market, the Economy, and the Presidential Election

A $4 pint of beer at Long Pine Store.

By Michael Hooper

I’ve heard grumblings from people who are worried about a recession coming to the United States.

I know a portfolio manager who has been predicting a recession for two years now.

He says consumers have increased their debt levels at a time of higher interest rates. They no longer have Covid money from the government, and credit and car loan delinquencies are rising. Yet the recession has not happened.

Against all odds, the consumer is very resilient. 

Looking at government data and railroad reports, I can see there should be no discrepancy here, the economy is positively growing.

Real gross domestic product increased at an annual rate of 2.8% in the second quarter of 2024, according to the advance estimate released by the US Bureau of Economic Analysis. In the first quarter real GDP increased 1.4%. That was a reduction from the 3.4% growth in the fourth quarter of 2023.

The 2.8% increase in the second quarter 2024 in real GDP reflected increases in consumer spending, private inventory investment, and non-residential fixed investments, the government said. Imports, which are a subtraction in the calculation of GDP, increased. Consumers spent more in both services and goods. Within services, the leading contributors were healthcare, housing and utilities and recreation services. Within goods the leading contributors were motor vehicles and parts, recreational goods and vehicles, furnishings and durable household equipment, gasoline and other energy products.

Railroads in America have been hauling more freight in the first half of 2024, according to the Association of American Railroads. In the first 29 weeks of 2024 US railroads reported a combined US traffic of 13.5 million carloads and intermodel units, an increase of 2.2% compared to last year year.

It appears to me that a lot of traffic is coming from shipping containers and trailers, as intermodel units were up 8% while carload numbers were down 4%. These intermodel units carry lot of freight from China and around the world.

The Fed has been fighting inflation for the past two years. And they’ve been largely succeeding as inflation has dropped to around 3% from a high of 9%. The fed’s goal is 2% inflation yet the Fed has given indications it will start lowering interest rates soon; that has helped propel the stock market to all-time highs.

The S&P 500 is up 14.8% year to date; the Dow Jones industrial average is up 7.6% and the NASDAQ is up 16.3% YTD. About 25% of my portfolio is invested in the S&P 500.

The unemployment rate spent much of the last two years around 3%, but has moved up to 4.1% in the latest estimates from the Bureau of Labor Statistics. I’m not too worried about this increase because 4.1% unemployment is still a fairly healthy economy. This just means that employers will have more to choose from in their next hire.

Jobless people suffer, especially those who have multiple debts, including credit card and car payments, student loans and mortgage payments. Because interest rates are so high, a lot of home owners are refusing to sell their properties because their next home will likely carry a higher interest rate mortgage. People who have to move for a job face tough choices.

I had opportunities to leave Topeka but I turned them down because after moving three times in three years, I felt like I’d be losing by starting over somewhere else. The real estate agent who sold us our house stopped sending us annual flowers after about five years. She figured it out. We weren’t going anywhere.

It’s tough to say at this juncture who is going to win the presidential election, but in all likelihood, I think Donald Trump will be our next president. I hope not. I think the man is despicable, and I’m voting for Kamala Harris. She’s a solid woman who has demonstrated courage and tenacity as a prosecutor and has learned the ropes of what it takes to be a president by working as vice president for Joe Biden for the past three and half years.

We may see a dip in the stock market ahead of the election, as third quarters are often negative. People fear the unknown, sell stocks and put the proceeds in money markets. I think the stock market will likely recover in the fourth quarter after the election is over.

One thing for sure I will not be betting against America. Business cycles come and go. Bear markets and recessions happen. But overtime the US economy seems to pick itself up and move ahead. The U.S. economy is full of inventors, entrepreneurs and creative people who come up with new and innovative ways for people to spend money.

When Warren Buffett bought BNSF Railway in 2010 he said it was “an all-in wager on the economic future of the United States.” At the time the economy was recovering from the financial crisis of 2008-09. His bet on America proved to be a good one, as the economy grew substantially over the past 14 years. He paid $44 billion for BNSF Railway; the railroad is probably worth $145 billion today, based on the market cap of Union Pacific Railway, its chief competitor.  

Warren Buffett did not make his money shorting stocks. He studied losers, just to avoid them, but he made his money investing in winners. I think the US economy is a winner, so I’m betting on it.