The future is not a place to which we are going, it is a place we are creating. ~ John Schaar (American scholar and political theorist)
On the economy
Given the dampening global economic indicators, consumer sentiment around the world and at home has been waning. Even a trade deal at this point seems unlikely to completely clear the air. CEOs and CFOs report being the most pessimistic since 2009. They anticipate diminishing business conditions that will cut into sales and force them to slow capital and personnel spending.
CEOs say the extreme uncertainty and near-daily fluctuations in tariffs and trade issues, if left unresolved, will cause lasting negative impacts on their businesses. Nearly 67% say conditions will worsen in just the next six months. Yet, only a third of CEOs have, or expect to, pass any trade expenses onto consumers at this time. Eventually costs will be felt one way (higher prices) or another (lost jobs and lowered business spending).
This is not a clear call that a recession is coming within six months. It is an acknowledgement that cautionary behaviors are expanding, as is to be expected given this point in the long expansion and our geopolitical trade wars.
Not all corners of the economy are sloughing off. The consumer continues to spend and by all accounts, will spend for a strong holiday season. Another important leading indicator is building permits. It takes 6-9 months to build the average home, which means employment and spending are highly certain until the home is complete. New permit requests have steadily grown since 2009 and are still exceeding economists’ predictions.
On the markets
The Federal Funds rate is notching back down. Twice in the 3rd quarter the Fed lowered the rate by 0.50% total. The cuts, the first since 2007, mean to ease tensions from a sluggish global economy. According to former Treasury secretary Larry Summers, whose views mimic many experts, more rate cuts could be needed. Negative rates in the US are not out of the realm of possibility, he says. Indeed, three years ago, then Fed Chair Janet Yellen said "We're taking a look at them ... I wouldn't take those off the table". The scenario is not unheard of – the banks of Japan, Switzerland and Sweden currently have negative rates.
Due to that dynamic, the bond market is just as interesting as the stock market (says almost no one, ever). But the experiment with barely-there-to-negative interest rates is on the rise. Governments and corporations continue to issue low and negative coupon bonds. Understandably, the demand for bonds with positive yields is strong and those bond prices continue to rise. A domestic long-term bond index returned 6.6% in the 3rd quarter. The Bloomberg Barclays US Aggregate Bond Index, a very good barometer of the intermediate bond market, was up 2.3% for the quarter and 8.5% for the year.
Compare those numbers to stock returns, which rode a roller coaster of a summer, ending just 1.7% ahead of where they started in July, but still up an incredible 20.5% year-to-date.
A volatile stock market is common during the later part of any economic boom. No surprise that large capitalization companies outperformed the small and that more defensive types (utilities) outperformed cyclical sectors (energy, materials). Still the stock market is giving signs that almost all is normal, no recession to see here. The bifurcation between what the bond markets and the stock markets are saying continues on for another spell. (Which brings to mind Halloween – happy Halloween if you made it this far in the letter!)
On personal finance
Our homes reflect who we are and have profound impacts on how we experience our lives. Homes are often our most valuable asset and most people reach to own one or several over their adult lives. However, ownership has been dropping across the country. The ratio of income to home prices has not changed much; the ratio is still a price of 3-4 times median income in most areas. But rather the demands on income have changed dramatically in the last several decades. Saving for a down payment is daunting while also paying down one’s student debt, covering higher healthcare costs, and saving for retirement or children’s future college expenses.
The concern is that home-price appreciation has been the way many middle-class Americans accumulated wealth over the last 70 years. Even with very low mortgage rates this century, middle and upper-income households with more than $100,000 in wages have opted to rent in droves. New luxury housing communities are being built all over the country with the exclusive purpose of becoming rental properties. The American dream, right or wrong, for all to own a home has stymied at 64.3% in the U.S.; ownership is less than 60% in the West.
Most impacted are millennials, who are now as “mature” as age 37. This is another area in which they continue to struggle to attain the wealth that their parents had achieved by the same age. To draw a finer point on this, the risk is that America’s already-wide wealth gap will just get wider.
As an aside, news out of Denmark’s housing market raised eyebrows this summer. A Danish bank has offered the world's first negative interest rate mortgage. Homeowners can get a 10 year mortgage for -0.5% annually, where every payment made reduces principal by more than paid. It sounds good on the surface but begs the question about the future value of the home and what it will be worth 10 years later. Could real estate become a depreciating asset? A question for another time perhaps; let’s revisit in 2029.
Disclosure
Statements on financial markets and economics are based on current market conditions and subject to change without notice. Due to the rapidly changing nature of financial markets, all information, views, opinions and estimates may quickly become outdated and are subject to change or correction. We provide information from reliable sources but should not be assumed accurate or complete.
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