Category Macro / Economy

Consumer Confidence Drops as Delinquencies Continue to Rise

Warren Buffett expressed caution around overpaying in his most recent letter. Jamie Dimon - JP Morgan CEO - said today there's a 50% chance of recession - with a soft landing slim. News of falling consumer confidence and rising credit delinquencies also hit the tape today. This begs a question: is the consumer in 2024 stronger than what we saw in 2023? My guess is no.

Powell Won’t be Bullied

As we started this year - I felt the market was getting ahead of itself. Not only was the tape approaching an overbought zone - it also assumed as many as six rate cuts (possibly seven) before the end of the year. What's more - it also priced in that earnings per share (EPS) would grow 12% year on year. It felt like a contradiction. For e.g., either the economy was reeling and needed (emergency) rate cuts; or the economy is expanding strongly (supporting earnings growth)? Today Fed Chair Jay Powell pushed back on the former. Markets should not expect rate cuts as early as March... stocks didn't like it.

Jobs Data: Choose Your Narrative

Today we learned that December added 216K jobs. CNN reported it as a "red hot" print. Was it? From mine, the headline number offers us very little. For example, what I want to know is the following (a) where are the jobs are being added (e.g. public vs private sector and what sectors); (b) what are people being paid per hour (is it rising or falling?); (c) are people working longer hours (as part time work doesn't pay a mortgage); and finally (d) what's the prevailing trend (as one month's data doesn't account for much). The headline number doesn't provide this detail - therefore we need to dig a little. My quick take - this report is weaker than what the headline suggests.

Did We Just Pull 2024’s Gains Forward?

Stocks were already partying into the Fed meeting (up ~12% over 6 weeks) - however when Powell provided his December update on monetary policy - he simply turned up the music. Risk was on. So here's my question - with stocks up an incredible 15% in just 7 weeks - how much of next year's potential gains have been pulled forward? Is it riskier now to buy stocks than it was a few weeks ago? To be clear, stocks are likely to add to their gains before the year is done - however we are now trading close to 20x next years earnings. That's not a bargain.

Cautious… But Invested

It's a brave person who is short the market. Probabilities suggest we are headed higher in the near-term. For example, previous episodes of Fed pausing suggests stocks typically gain. My sentiment today is best described as 'cautious... but invested'. To that end, one should always be invested to some extent. And whilst it's always unwise to be completely remiss of the risks -- it would be an even greater mistake not to have some exposure to higher quality risk assets and fixed income (at current yields)

Two Reasons the Fed Could Cut Rates

The latest set of economic numbers support a 'goldilocks' scenario for stocks. For example, durable goods orders continue to fall (a positive for inflation); and employment remains robust (a positive for growth). The question is what could cause the Fed to cut rates mid next year (given this is what is priced in)? I will offer two reasons... both of which I think are unlikely before June.

The Folly of Forecasting

July 24 this year the S&P 500 traded around 4600. At the time, gains were almost 20% for the year. The bulls had all the momentum and analysts were ratcheting up their end of year forecasts. Some felt 20% YTD gains were not enough - calling for even greater upside. What happened? Stocks corrected around 10% offering investors a better opportunity. The game of near-term forecasting is a fool's errand...

Did Ackman Just ‘Ring the Bell’ on Bond Yields?

Over the weekend - I made the case for investing in fixed income. I think there's a compelling longer-term opportunity for investors - where fixed income warrants exposure in your portfolio. Turns out, it may not be just me thinking this way. For example, last week I referenced Howard Marks' latest memo. He explained how some are offering equity-like returns for investors (e.g., above 8% for non-investment grade debt). What's more, Warren Buffett said he was increasing his exposure to bonds (at the short and long-end) a couple of months ago. Today billionaire investors Bill Ackman and Bill Gross were sounding the horn. Question: are we getting closer to a near-term peak in long-term yields?

Why Powell Oscillates b/w Dovish & Hawkish

Is Powell dovish or hawkish? The answer is he is both. And it's intentional. Part of the Chairman is looking in the rear-view mirror (strong jobs, GSP growth, wage pressure and inflation); and part of him is looking ahead (weaker growth; falling jobs; lower inflation). He straddles both sides. But what she he pay more attention to? The answer is the latter - but he can't ignore the former. That said, I also think the Chair's choice of language was interesting. He believes above trend growth and strong jobs are what's causing inflationary pressure - maybe in part. But I will argue it's the lagging effect of monetary policy... when you increase money supply by 40% in just 2 years.

Is it Still Going to be a “Soft Landing”?

2023 has been one of the more difficult years to navigate. For example, if you chose the wrong stocks, sectors or simply decided to hide in cash - you didn't fare well. However, what's also made it hard has been the various shifts in sentiment the past ~9 months. These shifts have 'whipped' traders around. Today, with the US 10-year yield challenging almost 5.0% - the "R" word is back in the vernacular. Much of this can be explained by understanding where we are in the economic cycle... and today it's "late cycle". The challenge is navigating this phase is the most difficult of any... as it will often last longer than many expect.