If you have listened to business news in the past 5-10 years, you have undoubtedly heard the term Goldilocks used in more than one instance. (Loyal readers may recall that I wrote a post about her at the end of last year as well!). If you’ve missed her, don’t worry – because she’s back! Media is once again commenting that the US finds itself in a Goldilocks’ economy. What do they mean?

The fairy tale is relatively well known – a wandering girl (Goldilocks) stumbles into the home of three bears. While she is there, she tastes the bowls of porridge trying to find one that is the perfect temperature – one is “too hot” one is “too cold” and one if “just right”

It turns out it also serves as the perfect analogy for many market-related dynamics in recent years. When referring to an economic data point or situation that is “just right,” the term Goldilocks is a perfect substitute.

Despite everyone’s concerns at the start of 2024 that things would be “too hot” (ie: inflation would continue to run rampant and never decline) or “too cold” (growth would plummet, job market would collapse, and a recession would begin), it seems as though they have instead ended up “just right”

What leads us to believe we may just be in a Goldilocks scenario:

*Inflation falling and job market steady – see last week’s post. Inflation is holding steady and falling (albeit slightly) and the job market is still strong (albeit not quite as strong as in recent years). The Fed is achieving their dual mandate

*Fed is focused on supporting growth – the Federal Reserve “put” is once again in play, meaning that the Fed is focused on preserving the job market and economic growth. And they can support that mission by continuing to lower rates. In a runaway inflationary environment, that “put” was off the table (as rates needs to stay high to mitigate inflationary pressure). But now, it’s back in play and will prove to be a powerful tailwind

*Consumer is discerning – the consumer is slowing down but certainly not dead. This is key as the US economy is heavily reliant on the consumer. The majority of consumers have jobs and are seeing their real wages increase (as inflation falls). They are being more discerning and adjusting where money is spent (experiences > things) but they are still spending. This is key to the ongoing growth of the US economy.

*Earnings are growing – earnings season is underway. So far, so good. Revenue growth is being shown (despite falling inflation) and expectations for future growth remain positive. We have a long way to go but thus far, there have been no dramatic earnings “cliffs” observed

*Sentiment remains in check – An insightful research report I read this week argued that valuations are related to risk appetite. Something is cheap?  That’s because no one owns it. No one has the risk appetite to want to buy the asset. Something is expensive? That’s because a lot of people have the appetite to pile into that asset. Plenty of risk appetite to chase prices higher. Based on investor sentiment and fund flows, there doesn’t appear to be excessive appetite to pile into equities. If anything, there is a common refrain of “let’s wait until the election” This is a good thing for current investors

There are plenty of risks remaining in the market (election & geopolitics to name the two big ones) that could easily tip the US economy back into the “too hot” or “too cold” scenario. But for now, it sure does seem like Goldilocks is back. I personally hope she sticks around for a while!

Onward we go,