The outcome and duration of the Middle East conflict remain uncertain. What is clear is that higher oil prices are inflationary, reduce consumer purchasing power, and weigh on consumer sentiment. This burden falls disproportionately on lower-income households for whom food and energy represent a larger share of the family budget.
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That said, higher energy prices alone are unlikely to push the U.S. economy into a recession. Spending on energy as a percentage of Personal Consumption Expenditures (PCE) has declined from nearly 10% in 1980 to approximately 4% today (exhibit 1), representing a structural shift that has held even through periodic price spikes. Food spending as a share of PCE has followed a similar long-term downward trend (exhibit 2). The U.S. economy is simply less energy-intensive than it once was, and that insulation matters.
We are not minimizing the real hardship that rising food and energy costs create for families. Rather, these higher costs are insufficient to significantly alter the growth trajectory of a fundamentally resilient economy.
Labor Markets Tell the More Important Story
There is no variable more central to the health of the U.S. economy than jobs creation. Over the past two years, monthly payroll growth has run consistently below the average pace of the prior business cycle from July 2009 through February 2020 even as the rate of GDP growth has been broadly similar (exhibit 3). Note that we use a 6-month moving average to help smooth out the month-to-month volatility.
Our work suggests that the recent slowdown in employment growth is more likely the result of structural labor constraints than the impact of artificial intelligence (AI). We think it is still too early in the AI adoption cycle for widespread worker displacement to occur at scale. Instead, labor force growth has slowed while the labor force participation rate has declined, especially for older workers. The pool of available non-retirement-age workers is simply smaller than historical norms would suggest, contributing to a period of moderate but still positive jobs creation. We expect this trend to continue.
More broadly, our work indicates that the substantial rise in business investment in research and development, along with expanding industrial capacity, is likely to become an increasingly important driver of economic growth over the coming decade. The environment that we anticipate should feature growing labor productivity at least as strong as we saw in the aftermath of the information technology revolution of the 1990s (exhibit 4).
Regarding inflation, we expect the year-over-year rate to ease back toward the 3% range in the coming months. Shelter costs, which are the largest single component of the Consumer Price Index, have broadly stabilized, and favorable year-over-year comparisons should provide additional relief in other categories.
GDP growth, meanwhile, should remain solid. Business investment continues at a healthy pace, and several fiscal tailwinds are in place, such as higher personal tax refunds, expanded immediate expensing of research and development costs, and the potential return of tariff refunds to corporate balance sheets.
INVESTMENT IMPLICATIONS
We recently increased the U.S. equity exposure across our Growth, Moderate Growth, and Conservative Growth Strategies while reducing our allocation to international equities, which face greater headwinds from persistently elevated energy costs.
Our existing equity themes including U.S. industrials, information technology, regional banks, and select emerging markets remain intact. Within fixed income, we added to mortgage-backed securities to capture attractive yields and a favorable risk/reward profile, while continuing to emphasize the belly of the yield curve and high-quality asset-backed securities.
With respect to our alternative investment allocations, we continue to favor equity option overlay strategies for current income and a multi-asset real return strategy for inflation mitigation and lower-correlation total returns. Our positioning is designed to be resilient across a range of geopolitical and energy-market outcomes.
THE CASH INDICATOR
Our Cash Indicator (CI) has moved toward its long-term median, after a prolonged period at relatively low levels that suggested investor complacency. Historically, readings near these levels have been consistent with markets functioning efficiently despite periodic bouts of volatility. The current reading suggests investors are fairly compensated for taking measured risks even amid ongoing geopolitical uncertainty and persistent inflation concerns.
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DISCLOSURES
Shelton Capital Management is an investment adviser in Denver, CO. Shelton Capital Management is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Shelton Capital Management only transacts business in states in which it is properly registered or is excluded or exempted from registration. Some of the firm’s strategies allocate client’s investment management assets among exchange-traded funds (“ETFs”). A GIPS Report along with a complete list and description of all composites is available by calling (800) 955-9988. A copy of Shelton Capital Management’s current written disclosure brochure filed with the SEC which discusses among other things, Shelton Capital Management’s business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov INVESTMENTS ARE NOT FDIC INSURED OR BANK GUARANTEED AND MAY LOSE VALUE. The views contained herein are not be taken as an advice or a recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to sup-port an investment decision. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested.
Past performance and yield may not be a reliable guide to future performance. Current performance may be higher or lower than the performance quoted. The securities identified and described may not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.
Data is provided by various sources and prepared by Shelton Capital Management and has not been verified or audited by an independent accountant.
