01.26.2024

The U.S. economy continues to grow despite higher interest rates. Real GDP growth came in at 3.3% in the fourth quarter, surpassing estimates for only 2%. Consumer spending was responsible for a little over half of the growth and remains the driving force behind this surging economy. With inflation waning, the Federal Reserve’s “soft landing” is becoming more likely and markets have taken notice. The Nasdaq, S&P 500, and Dow all posted new all-time highs last week.  

By historical standards, we are in rare air. The Conference Board, a trusted non-profit research group for economic data, released its latest index of Leading Economic Indicators (LEI) last week, showing a decline for the 21st consecutive month. The six-month decline in the LEI stands at -5.8% on an annualized basis, a level only seen during past recessions. If the Fed does indeed pull off its “soft landing,” it would be a truly remarkable feat.  

If anything is different this time, it is the extent of government spending. Much of the tightening in interest rates has been offset by one fiscal program or another. The Treasury has spent down its general account, backstopped banks, and offered generous employee retention tax credits as a few examples. More help is on the way in 2024 as IRA, Chips Act, and infrastructure spending packages take effect. In addition, a tax bill is working its way through Congress that would expand the child tax credit and allow businesses to deduct 100% of expenses for Research and Development up front. 

However, this support comes at a cost. The need for U.S. Treasury bond issuance is rising at a time when the appetite for government debt is shrinking. These supply and demand dynamics are pressuring interest rates higher for longer bond maturities. The brief reprieve in interest rates at the tail end of 2023 has not lasted. With rates on the rise again, growth stocks are once again outpacing value stocks. Higher yielding stocks with slower growth rates are struggling to keep pace as those companies face higher funding costs and greater competition for capital from fixed income. Because of this, we think it is appropriate to retain a focus on sustainable dividend growth over yield.  

Thanks,
Preston May, CBE®
Research Analyst

This report was prepared by Donaldson Capital Management, LLC, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information in these materials are from sources Donaldson Capital Management, LLC deems reliable, however we do not attest to their accuracy.

An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Past performance is not a guarantee of future results. The mention of specific securities and sectors illustrates the application of our investment approach only and is not to be considered a recommendation by Donaldson Capital Management, LLC.

S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.