Things You Don’t See in A Recession “There are no gains, without pains.” – Benjamin Franklin Incredibly, many strategists and economists continue to say we are headed for a bear market and a recession in ’24. That’s right, it is Outlook season and some of the forecasts for ’24 have been quite dour. The good news is we’ve been hearing this from the same crowd for well over a year now and things continue to chug right along. Also, I want to make sure you read the amazing blog Sonu Varghese, VP, Global Macro Strategist did yesterday on the consumer. In fact, a few things I discuss today he covered there as well, but his blog is simply amazing. Here’s a list of things you usually don’t see in a recession. Stocks at All-Time Highs Stocks lead the economy. It works on the way up and the way down. We have various indexes closing in on new all-time highs, but one of the most important indexes in the world is already at new highs. That’s right, the Dow (on a total return basis) just made a new all-time high. To us, this is the market’s way of saying the economy likely will be much stronger next year. People Traveling and Spending, a Lot The Sunday after Thanksgiving saw a record number of travelers according to the TSA. In fact, 2.9 million travelers passed through airports. Even more impressive is more than 90% of all flights were on time. It is hard to think consumers are pulling back on spending and worried about the economy starting to slip when they are traveling like never before. But consumers aren’t just buying airplane tickets, they are spending on many other things. People might complain about things, but that isn’t stopping them from taking that trip, driving their new $80,000 SUV, or updating their house. Here’s a nice chart that shows consumption is still running above the pre-COVID trend. That doesn’t look like a recession to me. Consumers Are in Much Better Shape Than the Media Claims All we hear about is how bad the consumer is doing and they will be tapped out soon. Fortunately, if you take the time to look at the actual data that isn’t the case. Would you believe real incomes are at an all-time high? Given consumers make up close to 70% of the economy, this bodes well for continued spending. We hear every day that things cost more and this is absolutely true, most products and services cost more than they did a few years ago (in many cases, a lot more). But what we rarely hear about is incomes are up a lot too, in fact, more in most cases. Even if prices might be higher, here’s a great table that shows that most people are making more over the past few years as well. Manufacturing Is Much Better Than the Headlines We continue to see manufacturing surveys tell one story, while the hard data tells a much different story. It is so impressive how strong parts of manufacturing have been, with real manufacturing construction at an all-time high and up more than 100% (on an inflation adjusted basis) the past three years and high tech construction spending soaring, up more than 900% the past three years. Yes, a good deal of this is due to the CHIPS Act and other fiscal policy decisions, but that doesn’t mean it has to be bad or can’t work. Just imagine what productivity might do over the coming years as the benefits for all this manufacturing construction is felt. We think this is a huge story going into the future and this isn’t something you’d expect to see if a recession was near. Lastly, let’s say the consumer slows some in ’24. We could see a scenario where manufacturing improves significantly next year, along with a big bounce in housing should rates pull back. Clearly housing has been a headwind to economic growth and manufacturing overall hasn’t added to growth much. Strength in these areas could potentially help offset any mild slowdown from consumers. Consumer Balance Sheets Appear to Be the Best They’ve Ever Been This take will upset many people, but balance sheets for households are much better than they were before the pandemic in many cases and very well could be in the best shape ever. Yes, debt is higher in places, but what is conveniently left out is net wealth. The improvement in housing prices has quietly created enormous wealth, while stocks have had a tremendous run as well. If someone owned a house and some stocks the past few years, they’ve likely substantially increased their overall net worth. Here’s a great table that shows just that. Assets are as high as they’ve ever been, while liabilities are near the same levels they’ve been for decades. We broke this down as a percent of disposable income to keep it consistent, but it tells a story you won’t hear on the nightly news and likely says no recession is coming in ’24.
December Almanac: Stronger in Pre-Election Years December is the number three S&P 500 and Dow Jones Industrials month since 1950, averaging gains of 1.4% and 1.5% respectively. It’s the second-best Russell 2000 (since 1979) month and third best for NASDAQ (since 1971). It is also the third best month for Russell 1000 (since 1979). In 2018, DJIA suffered its worst December performance since 1931 and its fourth worst December going all the way back to 1901. However, the market rarely falls precipitously in December and a repeat of 2018 does not seem highly likely this year. When December is down it is usually a turning point in the market—near a top or bottom. If the market has experienced fantastic gains leading up to December, stocks have pulled back in the first half of the month. In pre-election years, December’s overall ranking remains about the same across the board however, average gains improve handsomely. DJIA averages 2.7%, S&P 500 2.9%, NASDAQ 4.2%, Russell 1000 2.9%, and Russell 2000 3.0%. DJIA has advanced in 14 of the last 18 pre-election year Decembers. DJIA’s worst pre-election December was in 2015 when it declined a modest 1.7%. DJIA’s best pre-election year December was in 1991, up 9.5%. NASDAQ’s pre-election year December track record is somewhat mixed, up 7 and down 6. An 11.29% advance in 1991 and a whopping 22.0% in 1999 drive its average performance to 4.2%. Like DJIA, NASDAQ’s poorest pre-election year December was in 1983, off 2.5%.
Some More Good News for Bulls “Never bet on the end of the world. It never ends, and if it does, who will you settle the trade with?” -Art Cashin, Managing Director at UBS After one of the best months in history last month, the good news is we still see potentially bullish times coming. Here are a few things that caught my eye recently that could have bulls smiling. The S&P 500 added an incredible 8.9% last month, which was the 18th best month ever (since 1950). Here are the previous top 20 months ever and what happened next. The good news is higher a year later 80% of the time and up another 13.3% on average could have a lot of bulls smiling in 12 months. Here’s another way to look at large monthly gains. We found the S&P 500 gained at least 8% a total of 30 other times in history and stocks were higher a year later 90% of the time and up 15.8% on average. Once again, this signals the strength we just say was likely the beginning to more strength, not the end. The S&P 500 hasn’t hit an all-time high since January 2, 2022 – nearly two full years! Here’s the good news, the S&P 500 is about 5% away from new highs and we expect new highs to hit sometime early next year. But what investors need to know is previous times stocks went at least one full year without new highs and then hit one, the future returns were very solid. In fact, stocks were up 13 out of 14 times a year later and up 14.9% on average after long streaks without a new high and then finally making one. Lastly, we’ve heard time and time again that only seven stocks were going up. We disagreed with that, but there is no question that some of the largest tech and communications names have been spectacular this year. Well, times are a-changing, as we are now seeing this bull market broaden out, as many other groups are beginning to outperform. Last week, we saw a very rare breadth thrust, which suggested many stocks were surging, which tends to be a signal of impending strength. In fact, more than 60% of all components in the S&P 500 hit a new 20-day high last Friday. This is extremely rare and showed a lot of buying has taken place recently, not just in a few large stocks like they keep telling us. Looking into the data we found that the S&P 500 was higher a year later 15 out of 15 times and up 18.0% on average after previous signals. Wow. Any one of these signals by themselves could be argued to be random, but when you start stacking them all on top of each other, we continue to expect stocks to do quite well and we remain overweight equities (where we’ve been for a full year now).
December’s Quarterly Options Expiration Week Historically Bullish December’s quarterly options expiration week and the week after have the most bullish record of all quarterly option expirations (page 108, Stock Trader’s Almanac 2023 & 2024 Almanac). Since 1982, DJIA has advanced 30 times during December’s options expiration week with an average gain of 0.46%. In the following week, DJIA advanced 75.6% of the time with an average gain of 0.80%. S&P 500 has a similar, although slightly softer record. However, the record is not pristine. In 2021, accelerating inflation metrics triggered concerns that the Fed was behind the curve with monetary policy and last year there was a growing concern the Fed was going too far, too fast. In 2018, DJIA and S&P 500 suffered their worst weekly loss as the Fed remained hawkish and determined to raise interest rates even as economic growth was slowing and Treasury bond yields were falling. In 2011, Europe’s debt crisis derailed the market. In 2012, the threat of going over the fiscal cliff triggered a nearly 2% loss the week after. Going into next week, the market’s bullish historical trends will be tested by the Fed, CPI and PPI. The Fed is widely anticipated to hold rates steady, but everyone is still searching for clarity on whether the Fed is done along with any indication as to when rates may be cut. Today’s better than expected November employment report raises the stakes slightly, but the trend employment has been toward softer.
If You’re Worried About a Rising Unemployment Rate, Rest Easy for Now Last month we were talking about a potential deterioration in the labor market, as the unemployment rate rose to 3.9%. It was as low as 3.4% in the Spring. That increase was definitely something to worry about, as a rising unemployment rate usually signals that there’s more to come – which is the essence of what’s captured in the Sahm rule. (Ryan and I talked to the author of that rule, Claudia Sahm, a few weeks ago on Facts vs Feelings for more perspective on that.) Well, we now have really good news, because the unemployment rate fell back to 3.7% in November, the lowest since July. Of course, that is just one month, but the directional shift is welcome. More importantly, it hides some underlying labor market strength, because it came on the back of more than 500,000 people coming back into the labor force. In short, more people came back into the labor force, and they found jobs – both of which happen only in a strong, resilient labor market. Job Growth Is Still Strong, and Layoffs Are Running Low Payroll growth rose 199,000 in November, above expectations for closer to 180,000 jobs added. There’s been a boost from workers returning after the end of the autoworkers and Hollywood strikes, but that’s why the 3-month average is helpful, and that’s running at 204,000. For perspective, job growth averaged 163,000 a month in 2019. Note that we need about 100,000 – 125,000 net new jobs a month to keep up with population growth. We also got the comprehensive Job Openings and Labor Turnover Survey (JOLTS) data this week, which showed that layoffs continue to run extremely low. The “layoff rate,” which is layoffs as a percent of the employed workforce, is running at 1.0%, well below the 1.2-1.3% range we saw before the pandemic. Goldilocks = Strong Wage Growth + Falling Inflation Wage growth continues to run strong, with average hourly earnings for private workers rising at an annual rate of 3.4% over the last three months. It’s even better for non-managers, whose wage growth is running at 4.2%. These are running slightly above what we saw before the pandemic. Under normal circumstances, these wage growth numbers would lead the Federal Reserve (Fed) to worry about an economy that’s running too hot. But even they can rest easy since inflation is falling. As I pointed out last week, their preferred inflation metric, the personal consumption expenditures index excluding food and energy, is running at an annual pace of 2.4% over the last three months and 2.5% over the past six months. And the only reason those numbers remain above the Fed’s target of 2% is that the official rental inflation data severely lags the disinflation we’re actually seeing on the ground. So, there’s quite a bit more disinflation to come in the official data. Beyond the Fed, American households are also catching a break from falling energy prices. Nationwide average gas prices are now below $3.20/gallon, which is the lowest this year (as you can see in the chart below). The good news is that it’s likely to head even lower. All in all, we have Strong employment growth Strong wage growth Falling inflation All of which means inflation-adjusted incomes are rising at a pace of 2.5-3.0%. That’s good for consumption, which means the economy is on a solid footing with a still upbeat outlook for profits.
The Time To Get Back Into Bonds Probably the top fixed income question we’ve received in 2023 is when it’s appropriate to begin moving bond allocations from ultra-short-maturity bonds and money market funds back into core bonds. Gauging by 2024 rate hike expectations, the answer is probably sometime around now. The “perfect” time, assuming rates have peaked, was October 19 of this year, when the 10-year Treasury yield peaked at just under 5%, while the Bloomberg US Aggregate Bond Index (“Agg”) yield hit a high of 5.74%. The Agg still has a lot of ground to make up for 2021-2023 losses, but since October 19 it’s up 6.9% on a total return basis as of yesterday’s close. While yields may have fallen a little too far too fast, the timing of the rally is entirely normal and we believe it’s likely to continue, even if there may be some volatility along the way. As shown in the table below, historically, in the period from 12 months to 6 months before the first rate cut, core bonds (the Bloomberg US Aggregate Bond Index) outperform short maturity Treasuries (the FTSE 1-month Treasury Bill Index) by 1.1%, on average. It gets even better as you get closer to the cut, core bonds outperforming bills by an average of 4.4%. Outperformance slows down a little after the cut but continues in the year following the first cut. Right now, market-implied odds signal the first rate cut is most likely to come at the May 2024 regular Federal Reserve policy meeting, with expectations of 4-5 rate cuts in 2024 overall. If expectations are right, or even a little aggressive, we are in that historical sweet spot of the six-month period prior to the first cut now. We would take market-implied expectations with a grain of salt and believe they may be a little aggressive but are still right in principle. We’ll find out more when the Fed’s December policy meeting concludes tomorrow, when we expect the Fed to push back at current expectations but only causing a moderate shift. Carson Investment Research recently extended the maturity profile of our fixed income recommendation, moving it closer to the duration (a measure of interest rate sensitivity) of the broad Bloomberg US Aggregate Bond Index, which is a market-capped weighted index of investment-grade US Treasuries, mortgage-backed securities, and corporates. We do continue to prefer stocks to bonds based on our positive outlook for the US economy in 2024. But as inflation continues to decline, we think core bonds will increasingly return to their traditional role as a portfolio diversifier and ballast against potential bond losses while still offering an attractive yield.
Inflation Still Moving in the Right Direction Tue, Dec 12, 2023 This morning’s Consumer Price Index for November was mostly in line with expectations (although the headline reading was slightly higher than expected), and the lack of any meaningful surprises has allowed the market to continue with what has lately been the path of least resistance, which has been higher. The report also showed that the most rapid leg of disinflation is most likely behind us, and while that could lead some to believe that the road ahead will be a slog, that isn’t necessarily the case. For starters, the focus of monthly inflation reports lately has been in Core CPI (ex-food and energy). After peaking at 6.6% in June 2022, the November year/year reading came in at 4.0% for the second month in a row. The chart below shows the historical 12-month rate of change in the y/y core CPI. Over the last 12 months, that rate of increase has declined by two full percentage points, and outside of the prior two months, that is one of the sharpest declines since the early 1980s. In other words, the 12-month rate of change is still declining, but the pace of decline is slowing. November’s streak also ended what has been a monumental streak of monthly declines in the y/y core CPI reading. At seven months in October, it was the second longest streak on record, trailing only the ten-month streak of declines ending in December 1975. Understandably, the end of the streak of declines along with the slowing rate of decline in the y/y core CPI reading could lead one to think that inflation levels are plateauing at a higher level. However, a look at the trend of monthly prints in core CPI shows a potential tailwind in the months ahead. The chart below shows the monthly change in core CPI over the last 24 months. While it hasn’t exactly been linear, the trend is lower. In the twelve months from December 2021 through November 2022, eight out of twelve monthly prints were 0.5% or above, but in the last twelve months, only one print has been 0.5%. Just looking at the last year (shaded area in chart) it’s a similar trend. From December 2022 through May 2022, every monthly print was 0.4% or above, but in the most recent six months, every print has been 0.3% or below. If just the trend of the last six months remains in place, for the next six months the y/y reading will be replacing monthly prints of 0.4% or more with prints of 0.3% or less which should help to keep the trend of disinflation going.
Moderating Inflation & Final Fed Meeting Clear Path for late-December Surge This week’s CPI and PPI releases showed the moderating trend of inflation continues. Prices are still rising just at a slower pace and the rate of change could finally fall back before the Fed’s target of 2% next year. In response to and in anticipation of lower interest rates, the market has enjoyed above average gains in December. As of the close on December 12, DJIA was up 1.74%, S&P 500 +1.66%, NASDAQ +2.16% and Russell 2000 up an impressive 3.99% (right side vertical axis of chart above). The market did experience some typical early December weakness this year after bucking the trend of weakness on the first trading day. Even though the market has already enjoyed above average gains this month, we still anticipate more to come with the potential for a new all-time closing high from DJIA before year end.
Claims Cooling Down Thu, Dec 14, 2023 Economic data this morning broadly came in healthier than expected, including weekly jobless claims. Initial claims were expected to go unchanged at 220K. While that previous week's reading was revised up to 221K, this week's print fell all the way down to 202K. That is the lowest reading on jobless claims since the week of October 14th and September 16th before that. In all, that makes for one of the lowest readings on claims since January of last year. Before seasonal adjustment, claims are largely following the usual seasonal pattern having been trending higher since the early fall. Currently at 248.3K, unadjusted claims are running at the lowest level for the comparable week of the year since 1969. Continuing claims have gotten much more elevated than initial claims over the past few months. Currently totaling 1.876 million, continuing claims have risen meaningfully from the low of 1.658 million put in place just three months ago. However, the consistent pace of increases over that span (every week from September 16th through the first week of November saw a week over week increase) has slowed, having been more choppy in the past month. In fact, at 1.876 million, the current reading is still almost 50K below the recent high of 1.925 million set in mid-November.
Bulls Take the Majority Thu, Dec 14, 2023 More and more equity indices are hitting fresh record highs with the S&P 500 within 1.5% of doing the same. Understandably on these moves, investor sentiment has gotten a further boost. Per the latest AAII Investor Sentiment Survey, 51.3% of investors reported as bullish this week. And keep in mind, due to the timing of the survey, that would not have fully captured any investor response to yesterday's FOMC. That is the highest and first reading above 50% since July 20th of this year when bulls were only 0.1 percentage points higher. Outside of that week, it would be the highest bullish sentiment reading since April 2022. Given the new high in bulls, bears have been nowhere to be found. A meager 19.3% of respondents reported as bearish this week. That surpasses the recent low of 19.6% from just two weeks ago for the lowest amount since the first week of January 2018 when only 15.56% of responses were bearish. The overwhelmingly bullish sentiment can also be observed through the bull-bear spread. Currently, the share of bulls outnumber bears by 32 percentage points. That is the widest margin in favor of bulls since April 2021. Looked at another way, that is 2.1 standard deviations above the historical average of the spread meaning sentiment is extremely extended.. The cheery sentiment on the part of investors certainly means there is a warm and fuzzy feeling during this holiday season, but we would note that sentiment is historically a contrarian indicator. In other words, opposite to what investors are feeling, extremely bullish sentiment readings have historically been followed by more lackluster returns.
Wealth Effect Picks Up Into Christmas Fri, Dec 15, 2023 With just two weekends left to shop before Christmas, US consumers have to be feeling a little more flush than they were just a couple months ago. Back in October, the stock market was in a 10%+ drawdown and interest rates looked like they might never stop going up. Less than two months later, though, the S&P 500 Total Return index is suddenly trading at all-time highs as Treasury yields have plummeted. Maybe just as important for that "wealth effect" feeling is the huge drop in gas prices that we've seen since late September. Back on September 17th, AAA's national average gas price reading (the cost of a gallon of regular unleaded) hit a 52-week high of $3.88. In the three months since then, there has hardly been a day when gas prices haven't gone down, and just yesterday the price/gallon ticked down to $3.087. That drop took gas prices below the low of $3.096 seen last December 22nd to their lowest levels in more than two and a half years dating back to 6/24/21. With the stock market at new highs again and gas prices suddenly approaching a "2-handle," Santa may have a little more room in his gift sack this year!
All About Dow New Highs In the face of many worries, stocks have put together a historic year in ’23. To top things off, the Dow just hit a fresh new all-time high, its first new high since January 4, 2022. New Highs Happen More Than You Think Interestingly, this marked the 11th consecutive year that the Dow made a new high, the second longest streak ever! Of course, the previous two calendar years have had a total of only four new highs, but it still counts. Since 1900 there have been nearly 1,400 new highs, which actually comes out to 4.5% of all days since 1900 closing at a new all-time high. That is probably much more than most people expect. Stocks Lead the Economy Since markets are forward looking, stocks tend to lead the economy. This can work on the way up and way down, so for us new highs right now is suggesting the economy is on firm footing heading into ’24 and a stronger economy (with no recession) could be the play next year. Sure, there are always some examples of that ‘final new high’ right before trouble (1929, 2000, and 2007), but looking back at history, new highs rarely suggest impending doom right around the corner. Since World War II, there were 227 months that saw at least one new high for the Dow. A recession started within a year of one of those months only 26 times, or 11.5% of the time. Compare this with the economy being in a recession 13.9% of the time since WWII and new highs could be a subtle positive sign for the economy next year. The last new high for the Dow was nearly two years ago, so what happens after the Dow goes a long time without new high? I found 12 times since WWII it went at least a full year without a new high and then made one, and only twice did the economy fall into a recession within a year of that new high. What stood out about those two times was both saw Middle East turmoil and a spike in crude oil, likely contributing to the recession. Given the US now produces more oil than anyone, does it makes sense to bet against history and treat this new high as an exception? Here’s a tweet I sent on this idea. Now What? Plain and simple, new highs aren’t bearish events. In fact, you tend to see new highs take place during bull markets, with more advances potentially ahead. We’ve been calling this a new bull market for over a year now. As far back as last November we said the lows were in and there would be no recession in 2023 (with many arguing with us the whole way up). In fact, here’s an interview I did six months ago with Scott Wapner on CNBC’s Closing Bell. When he asked me what my biggest worry was, I said it was that too many people were bearish and weren’t embracing this bull market. So what do new highs mean by the numbers? By itself, a new high doesn’t appear to signal any warnings. In fact, things look about average after new highs. There are the nearly 1,400 new highs since 1900 and a year later the Dow was up 7.8% on average and higher 70.2% of the time. Compare this with the average year since 1900, which was up 7.4% on average and higher 65% of the time. But the Dow’s long break without a new high until now improves the outlook historically. Looking at those 12 times (since WWII) the Dow went at least one year without a new high and then finally made one, ol’ Papa Dow was higher a year later 10 times and up an average of 14.1% with a very solid median return of 16.4%.
The Inflation Problem Is Easing, and the Fed Expects to Cut Rates Wednesday, December 13th, was important for two reasons: The Federal Reserve (Fed) acknowledged that inflation is easing quite rapidly, and they plan to respond with rate cuts. The November producer price index (PPI) indicated that core inflation is back at the Fed’s target. Let’s start with the Fed meeting. A Data Dependent Fed Bows to the Data The Fed kept policy interest rates unchanged in the 5.25-5.0% range, but the big story really was that they officially acknowledged that inflation is easing. Their updated “summary of economic projections” saw their estimates of core inflation for 2023 revised down from 3.7% to 3.2%. The 2024 estimate was pulled down from 2.6% to 2.4%. If you think inflation is going to be softer than you initially expected, what would you do? Well, if you’re a Fed official, you’d pull down your estimates for future interest rates, and that’s exactly what they did. They actually did a couple of things, both of which were quite dovish: They removed the extra rate hike for 2023 that they’d originally penciled in. In other words, they don’t think rates are going any higher. They moved the 2024 rate estimate from 5.1% to 4.6%. The current rate is 5.4%, and the updated estimate implies they’ll cut rates by around 0.8%-points (about three 0.25%-point cuts) in 2023. Markets were off to the races after the Fed released their statement and projections – with bond yields falling, and equity markets rallying. Notably, Fed Chair Powell didn’t look to rain on the party in his press conference. Instead, he more or less reiterated the dovish outlook, noting that there has been progress on inflation, including in the categories they focus on. He once again emphasized that the risk of not doing enough to curb inflation was now balanced with the risk of holding rates too high for too long (and potentially breaking the economy in the process). Inflation Is Back at the Fed’s Target PPI data for November came in softer than expected, especially core PPI, which excludes the volatile food and energy components. The Fed’s preferred inflation metric is the personal consumption expenditures price index (PCE) and that takes several inputs from the PPI data, including for categories like health insurance and airfares. Core PCE typically runs lower than its counterpart, the core consumer price index (CPI). That’s even more so now because 40% of core CPI is comprised of rents, versus 17% in core PCE, and the official rental data is running at an annual inflation rate of 6% now. Note that this is really outdated compared to what’s happening in rental markets right now, with private market indices like Apartment List showing rents falling compared to last year. The good news is that the November CPI and PPI data indicate that core PCE was flat month over month in November. That means core inflation, using the Fed’s preferred metric, is running at an annual rate of 2.1% over the last three months, and 2% over the last six months. In other words, the inflation problem appears to be over, at least for now. Even looking ahead, it’s likely that used car prices continue to fall and lagged data for rents catch up to reality, keeping downward pressure on core inflation. Which means we expect the Fed is going to cut interest rates, as their own projections suggest. And it could come sooner rather than later. A Big Day for Markets, and a Potentially Big Boost for the Economy No surprise that markets liked everything that happened on Wednesday, including the prospect of a rate cut as early March (which investors estimate with a probability of almost 80%). Treasury yields headed even lower after Powell’s comments, with 1-year yields falling 0.22%-points to 4.91% and 2-year yields falling 0.3%-points to 4.43%. This was because markets are now estimating about 1.16%-points of cuts in 2024, more than Fed officials’ estimate of 0.80%-points. Equities rallied on the back of lower interest rates, with the S&P 500 Index rising 1.4% on Wednesday and leaving it less than 2% off its all-time high. Rate-sensitive sectors like utilities and real estate, outperformed. Even small cap stocks, which have been weighed down by higher rates, saw huge gains, with the Russell 2000 Index rising 3.5%. Lower interest rates also have potentially significant, and positive, effects on the economy. For one thing, it’ll immediately be reflected in mortgage rates. 30-year mortgage rates are now estimated to be close to 6.8%, down from around 8% in mid-October. Lower mortgage rates could unlock activity in the housing market, especially in the existing homes market, where activity has ground to a near halt amid high rates. Additional sales of homes can lead to more consumer spending, including household appliances, furnishings, and other household goods. Lower rates could also boost auto sales, as loans for used and new vehicles become more affordable. Those are just a couple of direct, near-term boosts for the economy. In the medium term, a better outlook for inflation and interest rates could also results in a pickup in business investment. In summary, the inflation tide has subsided quite decisively and that means a Fed pivot to interest rate cuts is on the horizon, which we expect to be very positive for markets and the economy. That’s very good news.
