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Changing Demographics

The markets look to hit new intra-day highs as investors continue to feel optimistic that a soft landing is the likely result of the Fed’s monetary policy actions of the past year.  Only three weeks into the new year and the technology sector continues to show staying power.  Chip optimism and AI headlines are helping support sentiment with many of the usual suspects experiencing outsized gains this year, including Nvidia (+20%), Meta (+8%), and Microsoft (+6%).  While the resilience of the economy suggests that interest rate cuts will be delayed, it nonetheless means that earnings and growth may not slow as quickly as previously thought.  This dichotomy will define the next few months.

This week we saw a slew of bank earnings announcements.  I was anxious to see what they reported because often it is an early indicator of both the health of the economy and upcoming earnings announcements from companies in other sectors.  I was pleased to see that, for the most part, I didn’t see increases in loan loss provisions which would typically indicate consumers are tapped out.  Additionally, while credit card debt continues to climb, we’re not seeing delinquencies or write-offs increase in a meaningful way.  What I read was reassuring despite assumptions of falling net interest income (NII) in the coming year and a general acceptance that loans growth will slow.  In a nutshell, the financial sector is pointing to a moderately slowing, yet resilient economy which is exactly what the Fed wants.

As mentioned in passing last week, Republicans and Democrats were close to reaching an agreement to fund the government through the end of the fiscal year.  This week we learned that they instead passed a temporary funding bill to fund the government into early March.  Both the Senate and the House passed the temporary bill which represents the third extension made for fiscal 2024 since October 1.  While some Republicans weren’t happy with this approach, it does give both parties more time to find common ground.

In company news, we learned this week that OpenAI has confirmed it is working with the U.S. military on cybersecurity and “other” programs, days after it removed language from its usage policy that forbids use of the technology by the world’s militaries.  Anyone else have visions of the Black Mirror episode named “Metalhead” (S04E05), where robotic (AI) dogs roam in a post-apocalyptic world?  In other news, Amazon is finding it hard to monetize Alexa.  When introduced, the company believed people would use its devices to order everyday items off its website.  It has not worked out as they had hoped, and now they are rumored to be working on an Alexa subscription service that will either be required to use the devices, or a supplement adding additional features and benefits.  And finally, Apple announced it will abandon the blood oxygen feature on its smartwatches to circumvent a U.S. ban if its court appeal fails.  Medical technology company Masimo sued Apple in 2020 saying the blood oxygen feature infringes on several of its patents and the International Trade Commission ruled in Masimo’s favor.  Apple is hoping for a motion to stay the order banning the importation of the Apple Watch (Series 9) for the entire appeal period and expects a ruling as soon as next week.

In closing, I want to relay a historic shift that is taking place that is having impact on the global economy.  According to the National Bureau of Statistics, China’s total population fell by over 2 million in 2023, marking the second straight year of contraction.  The decline also more than doubled that seen in 2022, when the Chinese population shrank for the first time since the Great Famine of the Mao Zedong era in 1961.  China has long been a key source of labor and demand, but its birth rate has continued to decline as couples delay or decide against having children (sound familiar?).  That’s despite the lifting of the government’s one-child policy in 2015 and incentives rolled out in 2021 that encourage people to have more babies (tax deductions, housing subsidies, and longer maternity leave).  Among the consequences are weak consumer and business confidence, mounting debt problems, and a spiraling property crisis.  The Chinese stock market was one of the world's outliers last year, sliding 20% compared to gains seen across the globe.  This demographic trend calls into question whether China will get old before it gets rich.  It seems declining population growth is not just a U.S. issue but a global problem.  The future truly is the children.  Now you know. 

Bruce J. Mason, MBA