The Gamble Begins

Issue 374

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

Mortgage Solutions presents Issue 374 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.

By the time most of you read this issue of Market Pulse, Donald Trump will have been sworn in as the 47th President of the United States. He promised us “change,” and over 75 million people voted for Mr. Trump and his “change” agenda. Our country was headed down a dark and dangerous path, and it is our sincere hope that the Trump Administration will put our country back on the right course.?

For those of you who don’t think a change is needed, consider these facts. The last comprehensive review of the federal government was completed in 1984, when the annual budget was $848 billion, the national debt was $1.6 trillion, and the debt to GDP ratio was 38%. The budget is now $7 trillion, the national debt is $36 trillion, and the debt to GDP ratio is 122%.?

The incoming Secretary of the Treasury, Scott Bessent, is an impressive individual. Having made billions as a seasoned and successful hedge fund “master of the universe” - he grasps the challenges at hand, and has a deep understanding of the economy and markets.?

Quoting from his confirmation hearing last Thursday: “I believe that President Trump has a generational opportunity to unleash a new economic golden age that will create more jobs, wealth, and prosperity for all Americans.”

“The federal government has a significant spending problem, driving deficits that have averaged a historically high 7% of GDP annually for the past four years. We must work to get our fiscal house in order and adjust federal domestic discretionary spending that has grown by an astonishing 40% over the past four years. Productive investment that grows the economy must be prioritized over wasteful spending that drives inflation.”

“This is the single most important economic issue of the day. This is pass/fail. If we do not fix these tax cuts, if we do not renew and extend, then we will be facing an economic calamity.”

IMHO, we are at, or very near a tipping point, and “change” couldn’t come at a better time.?

CPI INFLATION

The BLS reported that the CPI rose 0.4% in December, a little worse than the 0.3% that was expected. That put the annual CPI headline inflation rate at 2.9%, just 0.1% better than June of 2023. The core CPI (ex. food & energy) was up 0.2% in December, 0.1% better than expected, and up 3.2% year-over-year. Stocks and bonds rallied sharply on the news, but I don’t see how anything fundamental has changed.?

If we zoom-out and look at the CPI percentage change since the inflation started jumping in 2021:

CPI: 6.4%, Food & Beverage: 6.4%, All other items: 8.1%, Rent of Primary Residence: +13.5%.

My bottom line: With core inflation running at 3%, GDP also at 3%, the Bloomberg Commodities Index up 5% this month, Crude Oil is up 8.6% and Natural Gas is up 9.3% in January, with Gold & Silver up 3% and 5% this month respectively…why would anyone expect the Fed to cut interest rates? Not to mention that there is over $7 trillion in money market funds, and household net worth ballooned $50 trillion (or 42%) to a record $162 trillion during the past four years. No thanks Fed… we’re good!

THE STOCK MARKET

The S&P 500 just completed a standard 5% correction, giving back about 325 points from its all-time high and finding good support at the “Trump Election Gap” as noted in last week’s missive. The gap was at 5,783, and was filled at Monday’s low of 5,773. The market then proceeded to rally like a scalded dog, surging 241 points (4%) and trading up to 6,014 on Friday, before finishing the week at 5,996, up 169 points.?

The AAII sentiment survey had the bulls at just 25% last week, with the bears at 41%. The historical average for this sentiment survey is 37% bulls, and 31% bears. So, I suspect that a large part of last week’s rally was due to short-covering as the bears were getting stopped-out.?

The S&P 500 did not experience an official correction (10%) in 2024, which tells me that one should be expected this year. Based on the all-time high in December at 6,100 a 10% correction would come on a decline to 5,490. A bear market (20%) would be achieved with a decline to 4,880.?

In the week ahead, resistance for the S&P 500 should develop in the 6,015-6,050 region, followed by the December high at 6,100. Initial support starts at 5,912, followed by 5,827.?

After the Inauguration, there is likely to be quite a bit of volatility as President Trump executes his agenda: Tariffs, deportation, fiscal (spending) policies, tax and regulatory issues, executive orders, etc. Lots of headlines for the market to digest.?

THE BOND MARKET

What a nice reprieve in the bond market. Like stocks, bond prices soared last week posting impressive gains and appear to have finally hit a peak in yields. The 10-year Treasury yield started the week at 4.80% on Monday, but by Friday plummeted to a low of 4.56%, before finishing at 4.62%, down 14 basis points.?

For those of you who are counting, the 10-year Treasury yield rose during 50 of the past 83 days. That massive spike in yields has only happened four other times since 1960. This is uncharted territory - the 10-year Treasury yield has NEVER spiked this high AFTER the Fed started cutting interest rates. It begs the question: is this rise in yield due to ongoing inflation concerns or simply the prospects of a better economy under the Trump agenda??

The cost of servicing the U.S. debt is more than the Defense budget and Medicare combined, and continues to rise when interest rates rise. With the 10-year Treasury likely to settle in the 4.50% region for a while, and mortgage rates back over the key psychological 7.0% level, this could become a headwind for the housing market and overall economy. I suspect that later this year bond rates will come back down, but so much will depend on the Trump agenda.?

At these current levels, bond rates are attractively valued relative to equities, with the 10-year Treasury yield higher than the S&P 500 Earnings Yield. As mentioned last week, I see good value in buying in the 4.75% area for long-term portfolios.?

Markets will be closed on Monday in remembrance of Martin Luther King Day.

We remember Martin Luther King Jr today and appreciate his impact on American society.

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Jeff Trusheim is the CFO of Mortgage Solutions Financial. Jeff is a 30+ year veteran in the Wall Street arena, with a background in economics, risk assessment and finance (banking and mortgage). He has previously worked in Fortune 500 companies in growing their portfolio and economic footprint.