Fed Funds 5.25% - 5.5%, US Ten Year 4.145%, Oil $78.15
The economic data released this week was particularly good. Fourth quarter GDP data showed growth of 3.3%, well above the 2% expected. Personal Consumption Expenditures (core PCE, ex. food and energy) released December was a mere 0.2% month-over-month, and 2.9% year-over-year. Unemployment remains below 4%. So why according to the polls are so many according unhappy about the economy? Are there danger signs that we are not seeing?
One reason for the gloom among consumers is the strong rise in rents. For lower income people, spendable funds available after paying rent are the lowest in years. Medium and high-income households have experienced a mild drop in disposable income, but that of lower-income households is large. After paying for housing, lower income renters have less money left over than ever before.
Along with high rents we have high mortgage rates. Although lower than the 8% as recently as November, today‘s 6.5% mortgage rate is far above the 3.5% rates of a few years ago.This does not just affect housing either. Commercial real estate will be under tremendous pressure as owners roll over existing mortgages at today’s higher rates. That situation isnow worse by record vacancies in major American cities’ downtowns, a legacy of the working from home culture stemming from the Covid pandemic.The inability of owners to service their debts bodes poorly for the banks who hold their mortgages. Could we experience another banking crisis like we did in March, or a much larger one like that of the 2008financial crisis?From the chart below the drop in the pricesof office space is startling.
Another issue is the concentration of stock market capitalization held by the largest firms, the “magnificent seven” that we have heard so much about. Below we see that the dot-com boom of the nineties where a handful of companies dominated the market ended with the dot-bomb of 2000. Are we setting up for a similar outcome as the post-pandemic era of low interest rates ends?
The Treasury is refinancing its short-term debt with longer maturities. While stocks outperformed fixed-income last year, with rates expected to be “higher for longer,” it is still a good move to keep a portion of your portfolio in high quality fixed income securities.
Wishing You a Profitable Week,