In his macro update recorded Oct. 8, 2024, DoubleLine Deputy Chief Investment Officer Jeffrey Sherman finds the U.S. economy “is still in a decent spot,” albeit amid pockets of pain, including small businesses, and weakness among consumers. As for markets, he reads no imminent stresses in equity or even bond volatilities in addition to seeing fairer bond prices with U.S. Treasury yields above 4%, setting up an interesting market both for high-grade bonds and credit.
Highlights:
(0:16) Real GDP growth: Post-Great Financial Crisis (GFC), U.S. GDP has never recovered the 3%-plus real growth rate that had prevailed after World War II until the GFC. That said, Jeffrey Sherman notes the U.S. has resumed post-GFC trend growth, and looking globally, economies have begun beating expectations, with “the U.S. being the place to be.”
(4:13) Expansion of U.S. money supply as measured by M-2 and today’s federal deficit: In the wake of massive money printing in 2020-22, the money supply remains trillions of dollars above trendline growth. Excess M-2 is the product of massive deficit spending, which, notwithstanding a decline from its pandemic peak, remains at depths historically seen in the worst phases of recessions. The rise in interest rates means these deficits will be debt-financed, and maturing government debt will be refinanced at a higher cost to the government.
(9:20) Readings on the service and manufacturing sectors of the U.S. and the disconnect between the two, as well as readings on the inflation gauges. Within those optics, services remains in an expansionary mode while contributing to inflation, and manufacturing is in contraction but with prices paid reflecting disinflation.
(16:27) The labor market, whose strong September report, notwithstanding criticisms and limitations of the establishment and household surveys, “spooked the bond market.” In response to bearish interpretations of part-time job growth, Mr. Sherman notes a trend toward part-time employment has been underway for six years.
(25:51) Wage growth: a recent uptick and at healthy levels, including above levels pre-pandemic. “Unfortunately, using average hourly earnings,” Mr. Sherman observes, “inflation using headline CPI has outstripped the cumulative progress that people have made on their wages.”
(31:01) Signs of stress among U.S. consumers as tracked by consumer credit delinquencies and loan type. Some of this stress likely has been offset among consumers with higher net worth who have benefited from rising asset prices.
(32:51) Small businesses: the “pain point of the economy,” as these businesses borrow at float rating and, thus, are most exposed to rising interest rates. “They can’t go to the corporate bond market and do a debt offering. They’ve got to go to the bank” to borrow at short-term interest rates. “These folks are still paying in the high single digits to borrow money. Maybe this is part of the reason the Fed wanted to cut rates.”
(34:45) The meaning of the macro picture for markets: Mr. Sherman begins with market volatility across asset classes, with equity vol (measured by the Chicago Board Options Exchange Volatility Index, or VIX) muted, and rate vol (measured by the ICE BofA MOVE Index) at its highest level in 2024. “That’s what happens when the curve sells off 13 to 24 basis points across the curve. You’re going to get some rate volatility, but notice that these indicators don’t really seem to be signaling meaningful stress.”
(37:07) Bond market performance in the third quarter of 24: strong across the fixed income universe, particularly in fixed-rate securities, which have been anticipating easing monetary policy.
(39:00) YTD in credit, the market has rewarded investors “for junkiness,” with lower-rated securities outperforming their higher-rated counterparts.
(40:05) The U.S. dollar: While the recent decline of the dollar on FX markets has spurred questions about the federal fiscal trajectory, Mr. Sherman says the move is a function of U.S. interest rates and expectations of Federal Reserve rate cuts. The spike in Treasury yields Oct. 4 off the September labor reports offers a case in point: “All of a sudden the dollar pops back up again.”
As DoubleLine’s Deputy Chief Investment Officer, Jeffrey Sherman oversees and administers DoubleLine’s Investment Management sub-committee coordinating and implementing policies and processes across the investment teams. He also serves as lead portfolio manager for multi-sector and derivative-based strategies. Mr. Sherman is a member of DoubleLine’s Executive Management and Fixed Income Asset Allocation Committees. He can be heard regularly on his podcast “The Sherman Show” (Twitter @ShermanShowPod, ShermanShow@Doubleline.com) where he interviews distinguished guests, giving listeners insight into DoubleLine’s current views. In 2018, Money Management Executive named Jeffrey Sherman as one of “10 Fund Managers to Watch” in its yearly special report. Prior to joining DoubleLine in 2009, Mr. Sherman was a Senior Vice President at TCW where he worked as a portfolio manager and quantitative analyst focused on fixed income and real-asset portfolios. He was a statistics and mathematics instructor at both the University of the Pacific and Florida State University. Mr. Sherman taught Quantitative Methods for Level I candidates in the CFA LA/USC Review Program for many years. He holds a B.S. in Applied Mathematics from the University of the Pacific and an M.S. in Financial Engineering from the Claremont Graduate University. Mr. Sherman is a CFA® charterholder.
