DUH'K

Issue 288

By Jeffrey Trusheim, Chief Financial Officer, Mortgage Solutions of Colorado, LLC DBA, Mortgage Solutions Financial.

Mortgage Solutions presents Issue 288 of Market Pulse. This commentary will provide Trusheim's perspective of the economic, political, and technical considerations that will have an impact on the global & domestic financial marketplace. The report will provide a recap of the previous week's activity as well as a look at the important market-moving factors in the week ahead.

?

As a war-torn, battle-ready veteran who has been in the trenches fighting the “War on Wall Street” for nearly four decades, I have learned to live by several “truths” that have helped me to survive. I don’t trust correlations, nothing is ever just a coincidence, and it is never “different this time.” If it looks like a duck, walks like a duck, and quacks like a duck…guess what?

The U.S. economy is approaching, if not already in, a recession. Macroeconomic conditions continue to point towards weakness that would be expected to slow GDP growth as well as corporate earnings. Year to date, more than 236 U.S. corporations have filed for bankruptcy, the highest since 2010 and it’s only May.?The Conference Board Leading Index was down again this month by 0.6%, the 13th consecutive monthly decline. The Philly Fed Manufacturing index is now at -31.3, and the NY State Manufacturing index is similar at -31.8. These index levels have been associated with ALL recent recessions.?

We continue to see a severely inverted yield curve. The 3-month T-Bill closed at 5.27% on Friday, with the 10-year Treasury at 3.68%. That’s a negative -159 basis point inversion. EVERY recession has been preceded by an inverted yield curve, and EVERY inverted yield curve has preceded a recession.?

Job openings, as reported by the JOLTS data, has declined by about one million jobs in recent months. In the entire postwar period, there has NEVER been a decline in the job openings rate as large as what we have seen over the past year that was not accompanied by a recession and a large rise in the unemployment rate. Sadly, this probably means that the worst is yet to come.?

The NY Federal Reserve’s recent assessment of the economy shows a 60% probability of a recession in the next twelve months, which is its highest level since 1982. Although peak inflation is in the rearview mirror, it is nowhere near the Fed’s 2% target. Recent data shows inflation becoming “sticky”, and hanging around the 5% level. With the fed funds target being recently raised to 5.00%-5.25%, the current expectations are for the FOMC to pause their rate hiking policy and become more data dependent. Despite this, there is currently a 33% probability that the FOMC will raise rates again at their June 14th meeting.?

There are numerous other indicators that are pointing to a recession, more than I have room to talk about in this report. So unless “it’s different this time” and we toss out every indicator that has predicted a recession in the past that is aligned with a coming recession today, there is no way our economy dodges the bullet.

THE STOCK MARKET

After successfully testing important support levels near 4100 early last week, the S&P 500 finally gave us the expected upside breakout, with a nice rally to a fresh YTD high at 4212 on Friday before finishing the week at 4191, up 67 points. The stage is now set for the final rally leg from the October low, with the upside target still in the 4300-4350 region. The key level I am looking for is 4311, which represents a 61.8% Fibonacci retracement of last year’s decline.?

The exact path the market will take to 4300+ is not totally clear yet, but as long as the S&P 500 stays above key support at 4164, the probable path remains higher. As mentioned in recent missives, I have been using this rally (above 4100) to scale out of my equity holdings and move the cash I raised into T-Bills, which are currently yielding in excess of 5%. Nice (risk free) place to hide for now. I will most likely be out of all equity positions if/when we get to 4300.?

As mentioned last week, the market has “bad breath.” Just five stocks have accounted for 80% of the YTD gains. The tech heavy Nasdaq has gained 26% YTD, while the equal weighted S&P is nearly flat. 67% of Nasdaq stocks are below their 200-day moving average, while the top six stocks are up anywhere from 31% to 111% (NVDA, AAPL, MSFT, META, GOOG, TSLA). No touch!

EPS forecasts for the rest 2023 are currently round $215, and with a 19x multiple, the S&P would be valued at 4161. Earnings estimates for 2024 are coming in at $230-$240. If we give it an above average multiple of 18x, the fair value comes in around 4300. So, it is probably fair to say that this market has limited upside potential in the near-term future.?

Remember, the stock market has historically bottomed AFTER the Fed’s first rate cut. Also, be aware that the last time we had a debt ceiling default scare was in 2011, and most of the damage in stocks was done AFTER the debt ceiling agreement was reached. Will it “be different this time?”?

THE BOND MARKET

The 10-year Treasury started the week yielding 3.45% on Monday, but ratcheted higher to 3.72% by Friday, and finished at 3.68%, up 22 basis points. It appears that preparations are being made for a flood of new issues coming to market when the debt ceiling finally gets raised.?The Treasury General Account (TGA) balance has now shrunk to just $57 billion, which is $83 billion less than it’s balance a week ago. We are running out of money fast, and Congress better get their act together soon or there will be hell to pay. When the debt ceiling finally does get raised, you better button down the hatches and prepare for a “bumper crop” of fresh Treasuries flooding the market. I expect yields to move higher initially, but decline later as the anticipated recession takes hold, forcing the Fed to start cutting interest rates.?

Inflation break-evens are currently at : 1-year 4.5%, 2-year 2%, and 5-year 2.14%. The fed fund futures are showing Fed rate cuts starting at the September FOMC meeting, and continuing at the November, December and January meetings. The current fed funds rate in January 2024 sits at 4.5%.

?

Make it a great week!

For licensing information, go to https://mortgagesolutions.net/licensing-retail/