Middle of August, and it feels like it. My electric bill is proof it is hot. The good news is we are closer to October and looking forward to it feeling great outside again!
The Stock market and interest rates are not feeling great today, and the recession or no recession talk can make you feel hot or dizzy; let’s look at it a little closer.
The stock market has a correction on average every 19 months over the last 50 years. A correction is a drop of 10% or more. There have been times when we have had extended periods without a correction. Recently 2011 to 2015, we did not have one. The S&P 500 was at about 3,500 a year ago and 4,600 on July 27th. Today the index is at 4,370, a 10% correction would take it to 4,140. A correction can be good as the market resets and moves to new highs. It is not easy to watch your accounts move lower, but the S&P was up almost 30% over the last year, so we were due for a reset. Hang in there; most smart money guys feel the markets will be higher at year-end than where we are today. Buy the dips!
The interest rate market is hard to watch these days. The 10-year treasury tested a new 16-year high this week, getting to 4.30%, it was 3.74% a month ago, and mortgage rates have also increased. A lot of stuff going on as to why rates moved higher. Japan changed its interest rate policy, making it more attractive to buy their debt, a downgrade of the rating of US debt did not help, and the continued Fed policy of letting the balance sheet run-off have all attributed to the move higher. We still think we will have some rate relief at the end of this year into early next year. Not a drastic relief but being below 7 into the mid-6 range on the 30-year rate will help. Hopefully, rates will move into the high 5’s sometime mid to late next year. That would be great for everyone.
Part of the housing inventory problem is the mortgage handcuff. Homeowners feel handcuffed to their current interest rate, not necessarily the home. For 12 years, we had interest rates with a 3 or even, for a few years, a 2 in the first number. The handcuff is if your current mortgage is at 3.25%. For example, you do not want to lose that rate, so you’re tied to your current home and are not selling due to your current rate. The rates will come down at some point, and those handcuffs will be removed. People will sell and buy even if it means higher rates. We are just not there today. Everyone’s situation is different, and I am happy to discuss the options with you. Remember, you marry a home; you date the rate; you can buy today and refinance to a lower rate later!
What is the risk of a recession? For some time, I have been in the camp that we are going to have one, and it will be a shallow one or soft landing. The good news is interest rates move lower during and after a recession. The campgrounds are getting crowded with folks jumping on the soft-landing possibility. Now the no-recession possibility is a topic to talk about around the campfire. I am not buying into that possibility, and here is why. One of the most reliable predictors of a recession is an inverted yield curve; we have had that for a while now. The 2-year treasury is 4.94% today, and the 10-year is 4.23%.
Inversion is when short-term rates are higher than long-term rates, which is not normal for rates. Another consideration is the economy is doing well today; however, the impact of all the Fed rate hikes has yet to be fully felt. We are seeing signs of a slowdown. Manufacturing production, transportation of products, and inventory levels point to a slowdown. Here is the big concern for me. Consumer spending is the most significant part of the economy. The consumer can’t seem to stop spending today, but that will change. In March, the savings for American consumers was at $500 billion; at the end of June, the savings had fallen to $190 billion. At that spending rate, savings will be gone in just over a month. The consumers’ credit card debt has risen to a 10-year high, over 1 trillion dollars. The consumer is spending today but is running out of money or resources as credit cards have a balance limit. I expect the consumer to slow down spending as we move into the fall, and lower spending will slow the economy. Please don’t panic; we have a recession on average every 7 years, it is part of the economic cycles, and most recessions are minor. Once we realize we have a recession, we are often out of it. Recession or no recession will be talk and headlines for the next several months. I like to travel and love a soft, smooth landing; fingers crossed.
Now, on to some positive news! Home values continue to move higher in our markets, not as robust as previously, but higher still. If you own a home, your net worth over the last few years has grown a lot. If you have retirement accounts, the balance is much higher than last year’s. Fall and cooler weather are around the corner. Football season starts at the end of the month. Other than it is still too hot to play golf and the beach water feels like a steam bath, things are pretty good.
I have a taping with Denis Philips, chief meteorologist for ABC action news channel 10. We will be sharing it, so be on the lookout for it. We will discuss the current hurricane season and the rules to follow as storms approach us, and how they impact our industry. It should be fun and exciting!
As always, I am here to help you or anyone you may refer to me, and I appreciate the opportunity. Stay safe.
David