Have you ever taken on a difficult research project where the data is just all over the place and it’s difficult to come to any conclusions at all? I can tell you that economic analysis and reviews of market indicators have gotten like that lately. So, with tasks like this let’s just say it’s important to enjoy the process …
The housing market is really cooling! All the leaves are brown, and the sky is grey … If you’ve been keeping an eye on a statistic called Days on the Market (DOM), you would know that that the US median DOM has been increasing since 20221. It’s a cyclical thing and the graph appears in waves as the low point of every year, the least amount of Days on the Market coincides with late spring or early summer. But the trend is clear from the point on the graph in 2022 at 30 days on the market all the way to April of this year at 50 days on the market (currently 58). This must mean the economy overall is also cooling. The houses continue to sit there for sale as the leaves turn brown to the dismay of all The Mamas and The Papas in the US.
The housing market is really heating up! Let me stand next to your fire … Did you catch the explosion in new homes sales in August?2 It’s up 20%! That’s unreal. This is despite the data coming in during august where 30-year mortgages where at 6.63% (currently 6.37%). It’s data that is hard to ignore. This must mean the economy overall is heating up like a blazing guitar riff in a Hendrix jam.
Tech is with you always. Come rain or come shine.
“Days may be cloudy or sunny
We’re in or are we out of the money?
Yeah, but I’m with you always
I’m with you rain or shine.”
If you’re an investor, tech is with you always. The technology sector is responsible for 70% of the S&P 500’s YTD gain. Just 4 tech companies, Nvidia, Meta Platforms, Microsoft and Broadcom are responsible for 60% of the market’s increase this year. The top 10 stocks are, which are tech, now make up 34% of the market cap of the S&P 500. Nvidia just announced a mammoth deal that they’ll invest up to $100 billion in OpenAI to build the biggest AI infrastructure of all time. Tech is with you always. Come rain or come shine.
Tech is against you always. The answer is easy if you take it logically. I’d like to help you in your struggle to be free. There must be … 50 Ways to Leave Your Human …
Just plug in the jack, Jack,
Make a new Stan, Stan,
No need to employ Roy,
Just get yourself free.
Hop a new corpus, Gus,
Optimus don’t cost much!
The password’s the key, Lee,
To get yourself free.
We all know it’s coming, but that probably won’t change much of what is to come. Open AI’s CEO Sam Altman said on The Tucker Carlson Show recently that he believes AI could be responsible for widespread job losses3. It’s not real nice to hear the man orchestrating the future telling you what you fear to be true is true. Customer service specialists, developers and programmers are most likely to be replaced according to Altman. This take is corroborated by the folks at Goldman Sachs Research who think that 2.5% of workers in the US are at risk of losing their jobs with current technology, but up to 7% of the US Workforce could be replaced if CEOs widely adopt AI and innovations continue4. They observe that AI adoption has accelerated in larger companies. And we thought the million-plus jobs not created in the recent BLS job revisions was a problem for the economy … What will the unemployment rate be two years from now? Five?
Interest rates have to climb. I see a bad moon arising. I see trouble on the way. Look no further than the monthly rate of inflation increasing 0.4% in August to an annualized official rate of 2.9% (up from 2.7% in July). Powell stalled markets out a bit when he was hesitant to promise future interest rate declines and the Fed is probably never going to get to its target of 2% inflation. How can they keep lowering interest rates when the data is pointing the opposite direction? Don’t buy bonds tonight. They’re bound to take your life …
Interest rates have to fall. This June the economy actually lost 13,000 jobs, the first loss since December 2020. In August we only added 22,000 jobs. Keep in mind that you need to add 150,000 jobs per month according to St. Louis Fed economists to maintain a stable employment rates. That’s the “breakeven employment growth rate.” We’re so far under that statistic we can’t see it from here. So how can rates go up? It’s kind of like we’re just Waiting for a Star to Fall … No … that’s just cruel. I’m not going to put that song in your head. (snickers)
If you feel somewhat crazy after reading all the above bull and bear cases and hopefully singing along a bit in your head, you’re meant to. (Sorry!) It’s all meant to illustrate one journey we reluctantly embark on as money managers and financial planners: trying to read the tea leaves of the economy to guide you in the best way we know how. But you can see from above, from the diametrically opposing points of data in housing, technology, and direction of interest rates, deciphering the future confidently is very difficult.
If figuring out the direction of the economy is a non-starter then what’s needed is a portfolio that works in any economy – whether you’ve got rising GDP or falling GDP, rising inflation or falling inflation. You need a portfolio where the components are moving in different directions, because they are different instruments that react differently in different situations; a portfolio that has the potential to grow in any market condition and minimize losses in really bad ones.
That’s what we have here with the All-Weather Portfolio, and it was a chief topic of debate as we revised it yesterday in our Investment Committee meeting. We increased our gold allocation as well re-incorporated some long and intermediate-term bonds as interest rates have begun to fall. The goal is to maintain a portfolio that maintains success in any market weather and that involves having highly diversified investments that thrive in different market conditions. (Disclaimer: While the past performance of this strategy has been favorable, that’s never a guarantee of future results. Please contact us for all the risks, limitations, and other details regarding this strategy. ~ The Compliance Department.)
The bottom line is this: we’re not going to put on airs and pretend to be some kind of market soothsayer or Cassandra in her cave. What we will do is try to set your accounts up for success by handling a lot of the risk management within the portfolios we construct for you. While we don’t know the future, what we do have to say on risk management is important and please pause for a moment to consider it. If you listen to us (sing), we’ll change your financial world …
Sincerely,
Scott Wright
Portfolio Manager
The Wealth Training Academy
Sources:
1Housing Inventory: Median Days on Market in the United States (MEDDAYONMARUS) | FRED | St. Louis Fed
2August new home sales soar 20%
3https://www.yahoo.com/news/articles/sam-altman-predicts-ai-cause-102800375.html
4https://www.goldmansachs.com/insights/articles/how-will-ai-affect-the-global-workforce
