Dear Valued Clients and Friends –
Today was one of the very rare days where the stock market was open, the bond market was not, and the banking system was not (Columbus Day). I have said for many years that I think this whole setup is really ill-advised – that asset allocators and traders being what they are, there ends up being distortions in how these things play out when some parts of financial markets are open and others are not (in case you are wondering, I suspect many take what I just said to wish the stock market were closed today, whereas I meant it to say I wish the bond market and banking system were open today).
Dividend Cafe on Friday looked at a few key takeaways from our annual money manager week, particularly the challenges of private equity exits, the M&A boom I see coming, and what we think about the state of private credit. The written version is here (my favorite), the video is here, and the podcast is here.
I was on Varney/Fox Business last Thursday talking about the inflation report. I was on set with Varney for an hour Friday with the highlight reel here. I was on Bloomberg Friday afternoon talking about the financial sector.
Off we go …
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Market Action
- The market opened down a hundred points this morning and moved higher throughout the day.
- The Dow closed up +201 points (+0.47%), with the S&P +0.77% and the Nasdaq +0.87%
*CNBC, DJIA, Oct. 14, 2024
- How tight are credit spreads right now (i.e. very low cost of borrowing relative to the safe rate of treasuries)? Let’s put it this way … There are 117 companies in the S&P 500 where insurance can be bought on their debt (i.e., Credit Default Swaps) for LESS than insurance on United States Treasuries). Yep.
- The S&P 500’s rally on Friday had impressive 5-to-1 breadth (advance/decline ratio), but the Russell 2000 had a stunning 90% advance/decline day – something you do not see very often in small cap!
- The ten-year bond yield closed today at 4.096%, because that is where it closed Friday and the bond market was closed today!
- Top-performing sector for the day: Technology (+1.36%) & Utilities (+1.29%)
- Bottom-performing sector for the day: Energy (-0.10%)
- The Dow closed at another all-time high today
Public Policy
- One thing I will be very curious to know from whomever the new President appoints as his or her new Treasury Secretary is what they will do about the term structure of the U.S. debt. We currently have 90% of our debt fixed and just 10% variable, with the majority of the variable being TIPS (that adjust for inflation and are one of the most useful capital markets innovations ever invented). But within the 90% that is fixed, a stunningly high 22% are t-bills (ultra-short-term, which right now have the highest rates), over half are notes where the maturities are two-to-ten years, and only 16% are locked longer term. It is, shall we say, sub-optimal and surprising, and yet, if rates come down enough, it is about to move deficits way lower, which may prove to be the whole point.
- As we get closer to the election, the extremely tight nature of the electorate is abundantly clear to me. The manner in which blue states have gotten bluer, making red outreach there politically unhelpful, and red states have gotten redder, making blue outreach there politically unhelpful, is a major factor in our societal tribalization, but also a major factor in the very, very thin nature of how 4-6 battleground states will determine the election. In 1996 only seven states were decided by twenty or more points; in 2020, nineteen were …
Economic Front
- One of my favorite metrics when I think about the nightmare of public debt relative to GDP is how HOUSEHOLD debt relative to disposable income has dropped from nearly 140% in early 2008 to 90% now. Granted, our de-levering happened with their re-levering, but it is a positive metric that should not be ignored.
- Producer Prices were unchanged in September (+0% move month-over-month) and up just +1.8% now year-over-year. It should be pointed out that intermediate processed goods are down -2.7% versus a year ago and unprocessed goods are down -9.5% versus a year ago.
- Broadway show attendance (at record high prices) is back, tracking to 2019 levels, and is well above 2023 and 2022 (obviously, 2021 and 2020 are moot).
Housing & Mortgage
- I have been on record speculating that there is some “needed middle ground” in mortgage rates for when sellers give in and begin to take offers. This seems backward, no? The sellers don’t pay the rate, so why do they care? Because they often are paying a mortgage of 2-4% on the property they are selling and would have to replace it with a mortgage of 6-7% in their new home. I have speculated that the “thaw” level is somewhere just south of 5%, so use 4.9% if you are antsy. However, consensus forecasts for mortgage rates only show rates coming into the 5’s in 2025 and even early 2026, not the 4’s. This is all worth watching in the context of the speed with which the Fed acts.
Federal Reserve
- At this point additional half-point cuts this year are off the table. A quarter-point cut at the next meeting is 90% priced in and a further cut in December is 84% priced in. There is a 10% chance of no cut at one of those two meetings, but there is basically a 0% chance of no cuts for the rest of the year and a 0% chance of more than two quarter-point cuts. Essentially, the current effective fed funds rate of 4.83% is expected to end the year at 4.3%.
Oil and Energy
- WTI Crude closed at $74.02, down -2% on the day
- OPEC reduced forecasts for oil demand growth again this month, meaning they expect oil consumption to be up +1.9% from prior levels, but that +1.9% is less than had been previously expected. Demand erosion in China is behind the move.
- Midstream was up +1.5% last week as oil and energy stocks were also up on the week. Natural gas has dropped down to $2.63
Against Doomsdayism
- From techno-optimists like Marc Andreessen to economic think tanks across the land, there is a growing resistance to the dullness and static nature of collectivist, centralized planning. A doomsday spirit “neutralizes the human spirit” and impedes innovation. But realism is optimism and holds the key to overcoming the stasis-loving ideologies that impede human progress and growth.
Ask TBG
| “I may have missed a prior question on this subject but now that the 2-10 Treasury curve has flipped back to normal, can we expect a recession? Its been fairly consistent for decades.” ~ Roger M. |
| The times a recession came after the yield curve inverted (we have inversions before without a recession and recessions before without an inversion), the clock did not start at UN-inversion but at inversion. If we were to get a recession now about three years (or more) after the yield curve inverted, it would be the longest lag time in history and make it the most worthless leading indicator in history. |
Reach out with any questions, any time, and have a wonderful evening!
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
dbahnsen@thebahnsengroup.com
The Bahnsen Group
www.thebahnsengroup.com
The Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.
