Soft Landing Premise Still Driving Bullish Narrative
It is hard to find a seasoned investor who doesn’t believe the stock market is overbought on a short-term basis, but there are some underlying catalysts that continue to stoke investor enthusiasm. Bond prices have literally “spiked” sending mid-term to long-term yields decidedly lower, which has taken the average 30-year mortgage rate back down to the low 7% level and threatening to move into 6% territory. 15-year mortgage rates could well get back into the 5% range as well. This week’s inflation data could be the driver that pushes rates lower. Consumer Price Index (CPI) data is due out Tuesday with Producer Price Index (PPI) data due out Wednesday.
The latest employment data shows labor markets continue to loosen as the economy added 199,000 non-farm payrolls in November, marking the second consecutive month with job additions below the average 240,000 observed over the past year. Healthcare was the biggest contributor, adding 77,000 jobs, local governments added 49,000, manufacturing added only 28,000 jobs even as the UAW strike workers returned to their jobs during the month and retail shed an eyebrow-raising 38,000 jobs heading into the holiday season.
There is a tale of two economies occurring in the United States that are starkly different. A recent Harris poll found that about 65% of working Americans say they frequently live paycheck to paycheck, and 35% of them say they don’t have money left at the end of most months. At the very same time, record sales for Black Friday ($9.12 billion) and Cyber Monday ($11.3 billion) were posted, with the caveat that Buy Now, Pay Later (BNPL) purchases hit an all-time high, up 43% from a year ago, according to Adobe Analytics.
CNN reported that “During the third quarter, the rate of households becoming delinquent or entering serious delinquency (90 days or more behind) on their credit cards was the highest since the end of 2011, according to the Federal Reserve Bank of New York’s latest Quarterly Report on Household Debt and Credit released this month. Despite being fairly broad-based, with significant take-up among higher educated and higher income respondents, overall, we find that those with lower credit scores and greater unmet credit needs make up a disproportionate share of all BNPL users,” the researchers said.
So, there is potential for a stressed and leveraged consumer heading into the first quarter of 2024. The labor market will dictate consumer sentiment. We are already seeing hiring freezes in some industries, which are historically followed by layoffs that have been announced among technology and financial companies. The question is, does the layoff trend pick up speed? That is yet to be determined.
At present, Wall Street isn’t concerned about the consumer, but rather buying into the rally that left many a damaged investor from the August-October correction bloodied, battered and hyper-cautious as the yield on the 10-yr Treasury note hit 5.0% with JPMorgan CEO Jamie Dimon warning “Are you prepared for something like 7%?” America’s biggest banking honcho carries a lot of weight when he puts up a caution flag, and only until mid-November did the inflation data prove otherwise.
Additionally, and to the surprise of many, oil prices have slid hard as inventories have risen amid worries over weakness in end-demand markets as well as concerns about the duration of OPEC+ supply cuts, widespread cheating of quotas and dumping of crude on black markets by Russia and Iran. The national average price of gas has dropped to $3.15 per gallon, providing widespread relief to consumers and businesses alike — especially in the transportation sector. Cheaper gas prices were reflected in last week’s better-than-forecast University of Michigan Consumer Sentiment reading.
Several analysts are blaming weak crude pricing on a slowing Chinese economy that, despite the efforts of the PBOC and authorities in Beijing to shore up the lending and real estate markets, there are large cracks in the commercial real estate market and the huge shadow of banking industries. The year-to-date chart of the benchmark Shanghai Composite Index is showing signs of breaking down further even after President Xi came to San Franciso to reiterate to American companies that China is open for business.
Add to the mix the impact artificial intelligence (AI) is having on market sentiment and the halo effect it is having on dozens of stocks well outside the Magnificent Seven. That, and with the rally broadening out to include the beleaguered regional bank and small-cap sectors that are now in their second week of market gains, there is growing conviction that a retracement of the major averages before year-end is not going to materialize.
The Fed might try to maintain its “higher for longer” policy narrative, but the bond market isn’t having any part of it. Bond traders are on the side that inflation is falling to where the Fed can consider cutting rates as early as March, leading to an easing of financial conditions with the cost of capital coming down materially that will afford the economy to avert a recession. Wall Street bulls are embracing this very dynamic — that the power of lower interest rates pretty much cures all that currently ails the bear case for a hard landing. So far, it’s been the right call.
