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Last week, the stock market saw a surge, with the S&P 500 climbing 1.3% to conclude at 4,415.24. The index has risen by 15% so far, standing 23.4% above the low of 3,577.03 on Oct. 12, 2022, and 7.9% below the record closing high of 4,796.56 on Jan. 3, 2022.
Although the comprehensive data signifies sustained economic expansion, there are indications of escalating tensions that necessitate monitoring.
As per the New York Fed’s Q3 Household Debt and Credit (HHDC) report, the proportion of debt new variable in criminal activity The expense of mortgages, auto loans, and credit cards continues to surge.
When factoring in debt, criminal activity rates, while escalating, are still showing a return to pre-pandemic levels.
In essence, while the “flow” in new criminal activity is on the rise, the “stock” of criminal activity remains below pre-pandemic levels.
“As of September, 3.0% of outstanding loans were in some stage of delinquency, 0.4 percentage points higher than the second quarter, yet 1.7 percentage points lower than the fourth quarter of 2019,” stated New York Fed researchers.
Defaults have increased due to banks toughening lending standards.
Lending standards for residential real estate loans have tightened, per the Federal Reserve’s October senior loan officer opinion survey on bank lending practices…
…and for consumer loans.
In accordance with dullness, but not especially negative
There is little cause for celebration here, particularly if you are a consumer-driven individual or anticipate rapid economic expansion.
However, these deteriorating metrics seem to align with the Federal Reserve’s continuous efforts to curb inflation by restraining the economy through tightening monetary policies. In fact, key labor market indicators have been lackluster for over a year. Discover more about the evolving labor market Here, Here, HereAnd Here,
That being said, it might be too early to conclude that the declining economy is on track to spiral into a full-blown recession.
“Overall, this seems to be in line with weakness in consumer spending, but not particularly negative,” remarked JPMorgan’s Daniel Silver in response to the HHDC report.
Let’s be clear: Consumer finances are still in remarkably good condition.
“We should emphasize that household balance sheets appear very robust after a prolonged period of deleveraging since the global financial crisis, and this will help most households avoid the need to tighten their belts,” Daniel von Ahlen of Oxford Economics indicated on Friday. “It might be less.” “The surge in equity and home prices since the pandemic means household net worth is at a peak.”
It’s important to note that the deteriorating credit metrics discussed above occurred during a phase of robust GDP growth, supported by resilient consumer spending expansion. Furthermore, the economy continues to be bolstered by numerous other tailwinds indicating further expansion ahead.
Restarting student loan payments has had minimal impact
Up till now, the resumption of student loan payments has had minimal repercussions on the consumer landscape.
“We should also bear in mind that the 3Q [HHDC] report is probably too early to discern the potential adverse effects of the end of the moratorium on student loans, although initial readings from some concerning data suggest it won’t heavily impede consumers,” stated JPM’s Silver.
Chase consumer card spending data through Nov. 1 indicates that the U.S. Census’ controlled gauge of retail sales – utilized in calculating GDP growth – rose by 0.52% month-on-month in October, according to JPMorgan analysis.
Citing its proprietary data, analysts at Bank of America discovered a 0.2% drop in card spending in October.
Bank of America analysts wrote, “With the end of the student loan moratorium, many are speculating whether consumers will curtail spending to repay loans.” “Upon examining the spending of households who received [student loan] “After the initial payments in October 2023, we do not observe a clear sign of adverse impact relative to other household groups.”
For further details, read: What could the resumption of student loan payments imply for the economy?
Stay alert 👀
Simply because the stock market typically ascends and the economy typically expands doesn’t imply that it is always the case.
Bearish markets and assets’s recession risk present unfortunate hurdles in the journey towards long-term wealth accumulation.
To reiterate, the comprehensive data indicates sustained economic expansion – and consequently, suggests a progressively “Goldilocks” soft landing scenario where inflation moderates to manageable levels without plunging the economy into recession.
However, as the data continues to emerge, vigilance is crucial as we remain watchful for signs of a changing economic narrative.
Evaluating Macro Crosscurrent
Several noteworthy data points and macroeconomic developments from the past week that merit consideration include:
Moody’s downgrades US credit rating to negative, Moody’s altered its outlook for the US government’s AAA credit rating to “negative from stable” on Friday. According to Moody’s: “The primary reason for the downward revision is Moody’s assessment that risks to US fiscal strength have escalated and cannot be entirely offset by the sovereign’s unmatched credit strength. Elevated interest rates. Absent effective fiscal policy measures to reduce government spending or raise revenues, Moody’s anticipates a sizable fiscal deficit for the US, significantly weakening debt affordability. This is driven by ongoing political polarization within the US Congress.” “There is a growing risk that future administrations will be unable to reach a consensus on a fiscal plan to halt the deterioration in debt affordability.”
A shift in a bond rating agency’s outlook on the United States is generally not as dramatic as it may seem.
Decline in unemployment claims, Initial claims for unemployment benefits dropped to 217,000 during the week ending Nov. 4, down from below 220,000 a week earlier. While this is above the low of 182,000 in September 2022, it continues to hover around levels linked with economic growth.
Job changers facing diminishing salary hike benefits, As outlined by the Atlanta Fed’s wage growth tracker, the wage growth gap between job changers and those remaining in their jobs is narrowing. Job changers witnessed a 6.6% rise in wages in the 12 months ending in October, whereas those staying in their jobs experienced a 5.3% increase during the same period.
Decrease in mortgage rates, rise in mortgage applications, Bloomberg reported:“ The average 30-year mortgage rate saw the most substantial decline in over a year last week, resulting in the most significant upturn in home purchase applications since the start of June. The contract rate on the 30-year fixed mortgage dropped by 25 basis points. It fell to 7.61%, its lowest level since the close of September, according to the Mortgage Bankers Association. The association’s index of mortgage applications to buy a home rose by 3% in the week ending Nov. 3, as revealed by the data.
Record pace in oil extraction, According to Bloomberg: “US crude oil production reached an all-time high of 13.05 million barrels per day in August,” as per the US Energy Information Administration. [Oct. 31] In a monthly report. Production surpassed the previous high of 13 million barrels per day in November 2019. “US crude is playing an increasingly important role in global oil markets as OPEC+ leaders Saudi Arabia and Russia extend production cuts.”
Drop in gasoline prices, As per AAA: “The national average for a gallon of gas has decreased by four cents in the past week to $3.40. However, the consistent, albeit slow, pace of decrease could escalate following the recent dip in oil prices into the mid-$80s. Steady at a barrel a week ago, oil is now hovering around the mid-$70s. As it is the primary component of gasoline, a drop in oil prices typically leads to a reduction in gas prices.”
Here’s an intriguing perspective on gas prices Justin Wolfers: The number of minutes of work it takes to pay for one gallon of gas.
Deterioration in consumer sentiment, From the University of Michigan’s November survey of consumers: “Consumer sentiment declined for the fourth consecutive month, dropping by 5% in November. Although both current and anticipated personal finances saw a modest improvement this month, the long-term economic outlook receded by 12%, partly due to mounting concerns about the adverse effects of higher interest rates. The ongoing conflicts in Gaza and Ukraine also impacted numerous consumers. Overall, lower-income consumers and younger consumers “Expressed the most pronounced decline in sentiment. Conversely, the top third of sentiment among stock holders surged by 10%, reflecting the recent vigor in equity markets.”
Scarce inventory levels, Wholesale reserves amounted to $901.8 billion in September. The inventory/sales ratio was 1.33, down from 1.36 last year.
Easing of supply chain pressure, The New York Fed’s Global Supply Chain Stress Index – a composite of various supply chain indicators – reached its nadir in October and remains beneath levels seen even before the pandemic. This is markedly less than the zenith of the supply chain crisis in December 2021.
Positive near-term GDP growth projections, The Atlanta Fed’s GDPNow model anticipates real GDP growth surging to 2.1% in Q4.
Pulling it all together
We are consistently observing signs that indicate an evolving “Goldilocks” soft landing scenario, where inflation could be reined in to manageable levels without precipitating an economic recession.
This stands amidst the Federal Reserve embracing an extremely stringent monetary policy in its continual efforts to tamp down inflation. Even though the Fed has assumed a less hawkish position in 2023 compared to 2022, and most economists concur that the ultimate interest rate hike of the cycle has either already occurred or is imminent, inflation is set to persist as a pressure point. It will necessitate patience and time before the central bank finds solace in price stability.
Hence, we should anticipate the central bank maintaining a stringent monetary policy, which signifies the need to prepare for tighter financial conditions (e.g., higher interest rates, stricter lending standards, and lower stock valuations). Consequently, monetary policy will not be favoring the market for some time, and the peril of the economy sliding into recession will be relatively elevated.
Simultaneously, it’s important to recognize that stocks have predictive mechanisms – implying that prices will plummet before the Fed signals a substantial accommodating shift in monetary policy.
At the same time, it’s crucial to remember that although the risk of recession may increase, consumers are operating from a robust financial stance. Unemployed individuals are securing jobs, and those with jobs are witnessing salary hikes.
Similarly, corporate finances are also robust as many corporations have secured low interest rates on their loans in recent years. Although the threat of higher debt service costs looms, augmented profit margins afford corporations the leeway to absorb heightened costs.
At present, any impending recession is unlikely to evolve into an economic catastrophe considering the strong financial health of consumers and businesses.
As always, long-term investors should bear in mind that recessions and bear markets are inherent in the stock market journey aimed at generating long-term returns. Although the markets have weathered challenging times in recent years, the long-term outlook for stocks remains favorable.
Note: An iteration of this article was released TKer.co,