Before I dive into the market and the economy let me just say this: Goodbye and good riddance to Twitter. The “World’s Town Hall” is now a private company and Elon Musk will do what he wants with it. I really could care less. Yes, I am on Twitter and yes, I have roughly five thousand followers but I rarely use it and I rarely go on it for any reason. I get where some people use the platform to build “Their Brand” but to me it’s just a place to waste a few hours a day scrolling through feeds. Like Instagram, it provides little value. Plus, you really have no clue if the person is real or telling the truth so why waste time on it.
I once had an argument on CNBC with some tech guy from San Fransisco about the purpose of Twitter and he believed it was the greatest source of instantaneous news ever. OK, but in your day to day life, what does getting news about a coup in Somalia or some breaking story about the extinction of a small fish in the Amazon really do for you? Nothing. You are better informed? Maybe, but you can read about 95% of everything online at some verified news outlet. Being in touch with instantaneous news feeds that may or may not be true will not make you smarter, better or richer. I may hate the New York Times but if they report about an uprising in Somalia, you can be damn sure it is verified and close enough to the truth. One thing that he did mention in our argument is that he is up to date with all the breaking business news and this is where I got him. I said by the time you react to any news on Twitter, 500 computer programs have already taken advantage of that news and you literally will be the guy those programs sell to as the stock has already made its move. You are carcass that the vultures feed off of. He didn’t like that for sure. My point is, I really could care less what Elon Musk does with Twitter. The vileness of the political discourse will just find another home.
As we come into another important week, we can look back at the action last week and maybe, just maybe, we have seen the bottom and the bull market will return. Eh, not so fast. Yes, last week was impressive and there were some positive takeaways. Inflation seems to easing a touch. The economy is still showing signs of strength. Oh, yea, GDP numbers surprised.
Let me be the wet blanket for a moment. Inflation seems to be easing but gas prices are back on the rise. There is also talk of a diesel shortage going into the winter which could increase home heating oil prices by 25%. On top of the steep rises we have seen, this could be a major situation that bears watching. Housing has taken several hits and with rising mortgage rates, that may last until the spring. With that, a recession is still very possible. Oh, yea, the Fed is meeting this week and the expectation is for a 75 basis point rise in interest rates as well.
So you do have some positives this Halloween Monday but you also have some negatives as well and what the Fed announces on Wednesday won’t clarify much. Three weeks ago I would say that the chances of a 75 BP move would be almost 100%, now I will say its probably 60-40 for that hike.
Touching on the Fed. Because of their delay in acting at the beginning of this inflationary cycle, inflation increased month after month until the Fed decided that it wasn’t temporary and started this rate hike cycle. In subsequent speeches Fed Governors all declared that the Fed was going to be aggressive in dealing with this scourge and they pretty much have. Yet, the softening is very slow and factors they can’t control have kept inflationary pressures up. So, do we believe that the Fed will continue to try to tamp down inflation with a large hike or will that look at the positives in the economy and slow the process? I will go with staying aggressive and raising the Fed Funds rate by 75 basis points.
I expect to see a softening in this latest market rally simply because the underpinnings of the rally really aren’t that strong and an aggressive Fed policy generally does not end well.
I know I am beating a dead horse with my focus on housing but you cannot deny the impact of higher mortgage rates and inflated housing prices will have on the overall economy. Roughly 15% of this country’s GDP is tied up in some component of the housing sector and while we have rallied back to 3.5% unemployment, that picture would change drastically if the housing slump continues. The ripple effect is considerable and that is why I drag it into almost every conversation.
Considering the weakness in the tech sector over the last couple of weeks I think the S&P has held up very well and that gives me a little caution going forward. Earnings are not meeting expectations in the group and the next couple of quarters seem to be suspect as well, yet, a majority of the sector is still trading above already inflated PE’s. To me, that is a sign that there is still some downside room,(granted the sector has always traded at inflated valuations).
Apparently, Facebook (Meta, whatever) Microsoft, Alphabet will never see a down day again and the sky is the limit with this sector.
However, realistically, they can trade at a certain valuation because they have a certain level of earnings that they have consistently met. That was generally because they figured out how to increase profits quarter after quarter. That may have slowed. Their core profit centers are no longer sustaining unending growth. Look at the growth of Microsoft’s cloud operation. Sure it is tremendously profitable but that angle of growth is leveling off and may, within a year or so, decline. That won’t be good for Microsoft or any other cloud company as well. Higher interest rates have a much more deleterious impact on tech companies as it impacts future investment and future earnings growth.
Looking at the bigger picture, with two large segments of the economy possibly in a short term decline, why would you ever think a market rally would sustain itself over a longer period of time? It can’t. There will be some readers that will throw the “Consumers are 70% of the economy” nonsense at me and I will just respond with those consumers buy houses too. They buy new refrigerators and washers and dryers and with the slump in housing comes a slump in big ticket items. With higher interest rates, home improvement loans shrink. The consumers you talk about are still there, they always will be but will they be spending at levels comparable to last year or pre-pandemic? I don’t think so.
So. While we don’t have total clarity on the future (by the way, we never do) we have quite a few indications that things are mediocre now and probably will get worse before they get better. Is that a strong foundation for investment? You decide.
Pete I think you are spot on regarding the housing market. I feel we will feel the impact 1st to 2nd quarter next year. Really like your articles
Thank you Kevin.
I try to be upfront and make it simple.