Resilient Spending

Issue 361

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

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Mortgage Solutions presents Issue 361 of Market Pulse. This commentary will provide Trusheim's perspective on 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.

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THE RESILIENT CONSUMER CONTINUES TO SPEND

Consumers and consumer spending represent 70% of our nations GDP. A good and reliable indication of how much consumers are spending can be found in the monthly Retail Sales report. That report was released last week and showed retail sales strengthened in September by more than forecast. The value of retail purchases increased by 0.4%, after a 0.1% gain in August. Excluded autos and gasoline stations, retail sales climbed by 0.7% in September.?

The sales figures cap another quarter of solid economic growth fueled by a strong labor market. The number of Americans filing for unemployment benefits last week fell by the most in three months as the job market continues to show resilience despite historically high credit card and consumer finance rates. Applications for jobless claims fell by 19,000 to 241,000 for the week of October 12th. That’s well below the 262,000 analysts were expecting.?

Ten of the thirteen categories in the Retail Sales report posted increases in spending, with annualized sales now at a 6.4% pace and the strongest since early 2023. Despite all of the rhetoric about getting squeezed by high prices, Americans have kept spending at retail stores and restaurants at a surprisingly strong pace.?

?Why and how is that? The simple answer is the wealth effect. Those who have good jobs are seeing gains in income. Those who own their homes have watched prices skyrocket 40% since the Covid era. Those who are invested in the stock market have experienced 20%+ returns in recent years. This trend, documented by the Federal Reserve, suggests that consumer spending is not only the driver of?the U.S. economy but also should help sustain healthy growth in the years ahead. Why a 50-basis point cut?

Thinking Out Loud:? So, what happened to the recession? Is it still coming and just being delayed? Or is it “off the table” and forgotten? From an academic perspective, I share the Fed’s concern, with most of the traditional recession indicators remaining active. As a student of the markets, I see many of the conventional technical indicators flashing the yellow caution signal. Here is one of my concerns:

Without digging too deep into the esoteric weeds, I think that “private credit” may be keeping businesses afloat that otherwise would sink. “Private Credit” is leverage on top of leverage. The borrowers are highly levered, the lenders are levered, and the various associated securitization structures are levered. The U.S. economy is in the throes of a historic - and deeply systemic - “subprime” bubble. “Private Credit” is risky “subprime” lending, having evolved into a primary source of finance for unprofitable businesses. On the consumer side, “subprime” auto and credit card lending continues to boom. And we will probably look back and view the proliferation of “buy now, pay later” lending programs as principally “subprime.” Stay tuned - This could be trouble.

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THE STOCK MARKET

The historic bull market continued last week, with the S&P 500 completing a six-week win streak and posting its 47th record high of the year. Our target of 5840, which was projected from the breakout in early September, was finally met last week with a high at 5872 and a closing price at 5864, up 49 points.?

Here is where we stand year-to-date: S&P 500 +23%, Dow +15%, Utilities +29%, Banks +27%, Russell +12%, Nasdaq +21%, Semiconductors +25%. Gold shot up $65 to a new record high at $2,721 oz. +41%.? Silver outshined them all with a 7% gain on the week and a closing price at $33.72 oz, up 42% on the year.?

A Bank of America survey had an interesting read on market sentiment last week. “Investors are getting so bullish that it might be time to sell global stocks. Allocations to stocks surged, while bond exposure sank and cash levels fell to 3.9% in October from 4.2% last month, triggering a ‘sell signal’ on global equities. The October survey showed the biggest jump in investor optimism since June 2020 on Federal Reserve cuts, Chine stimulus, and a soft landing”, said BoA analyst Michael Hartnett.?

My technical parameters haven’t changed. As long as the major support region around 5670 holds on any pullback, I have to view the market as pointing higher with the next upside targets at 6000+.?

October can be a “spooky” month for both the bulls and the bears. Last week, on October 15th, the current bull market turned two years old. The low price on that dreadful day in 2022 was about 3500 on the S&P 500, a long way from today’s price above 5800! Another monumental day was October 19, 1987 - Black Monday; the S&P sank 20% on that day, which was the worst single-day drop since the Great Depression in 1929. Historically, the month of October typically loses 5.3%. Stay on your toes!

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THE BOND MARKET

When Fed Chair Jerome Powell “rang the bell” and cut the Fed funds rate by 50 basis points on September 19th, who would have thought that the 10-year Treasury yield would be 52 basis points HIGHER a month later? Yes, in the span of just a few weeks, the 10-year Treasury gave back 40% of the gains in 2024 - gone - up in smoke!

Interesting fact: Credit spreads (difference in yield from corporate bonds to Treasuries) from AAA to Junk bonds, are currently trading near all-time lows.?

Be prepared for some fireworks after the November 5th presidential election. Option prices on Treasuries are currently anticipating an 18-basis point move across the yield curve, which may be the biggest? ‘event day’ move ever. It’s gonna be huge!

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Have a great week!?

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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.

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