Business spending ‘FUELING’ growth alongside consumers: Cresset CIO

Key Concepts

• Dow Jones Transportation Index: A market proxy used to gauge the health of the broader economy based on the movement of goods.
• Manufacturing Renaissance: A period of industrial growth driven by AI, reshoring, and electrification.
• Dr. Copper: A nickname for copper, often used as a leading economic indicator due to its widespread use in industrial applications.
• CAPEX (Capital Expenditure): Funds used by companies to acquire, upgrade, and maintain physical assets like factories and data centers.
• Magnificent Seven (Mag 7): A group of high-performing U.S. technology stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla).
• Discretionary Spending: Non-essential consumer spending on items like furniture, electronics, and department store goods.

1. Economic Indicators and the Manufacturing Renaissance

The discussion highlights the Dow Jones Transportation Index as a "parabolic" indicator of economic strength, contradicting fears of a recession or runaway inflation. This growth is attributed to a "manufacturing renaissance" fueled by:

• AI-driven infrastructure: Significant investment in data centers and communication equipment.
• Dr. Copper: The price action of copper corroborates the strength in the industrial sector, signaling that the economy remains robust.
• CAPEX vs. Consumption: A notable shift is occurring where business spending (CAPEX) is contributing nearly as much to economic growth as consumer spending. Jack Ablin notes that this is "better spending" because it drives long-term productivity and growth, whereas consumer spending is primarily for immediate consumption.

2. Investment Strategies and Sector Picks

Jack Ablin (CIO of Cresset) advocates for investment in the Industrial Sector (XLI), citing several structural tailwinds:

• Reshoring and Electrification: These trends are driving the need for new manufacturing facilities.
• AI Beneficiaries: Rather than fearing AI, investors should look at companies building the physical infrastructure for it—specifically Caterpillar, Grainger, and Fastenal. These are described as "old, boring names" that are essential to the current industrial buildout.
• Healthcare: United Therapeutics is highlighted for its strong cash flow and solid performance.

3. Consumer Discretionary Trends

Despite concerns that high gas prices would dampen consumer spending, recent retail sales data shows resilience:

• Growth Areas: Significant gains were noted in furniture, electronics, building materials, and department stores (up 4.2%).
• Data Validation: Bank of America credit card spending trends corroborate the retail sales data, suggesting that the consumer remains active.
• Stock Picks: Ablin favors Costco for consistent margins and Amazon and Meta for their exposure to AI and strong earnings potential.

4. The "Magnificent Seven" and Earnings Outlook

Ablin argues that the "Mag 7" stocks are currently undervalued relative to their earnings expectations.

• Earnings Growth: Analyst expectations for earnings growth have been revised upward from 13.5% at the start of the year to 18%.
• Market Sentiment: Despite geopolitical tensions (e.g., Iran), the market is showing resilience, and analysts continue to raise their forecasts.

5. Federal Reserve Outlook

The discussion touches on the potential appointment of Kevin Warsh to the Federal Reserve:

• Credibility: Warsh is viewed as a "solid player" with prior FOMC experience.
• Monetary Philosophy: Ablin highlights Warsh’s philosophical opposition to expanding the Fed’s balance sheet as a positive factor for market stability and Fed independence.

Synthesis and Conclusion

The current economic landscape is defined by a transition from a purely consumer-driven economy to one heavily supported by a manufacturing and infrastructure boom. By focusing on CAPEX-heavy industries (industrial, data center construction) and resilient consumer discretionary stocks, investors can capitalize on the productivity gains driven by AI and reshoring. The upward revision of earnings expectations and the potential for a disciplined approach to the Federal Reserve balance sheet suggest a positive outlook for the market, provided the industrial momentum continues.