A Tale of Two Markets

Issue 372

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

Mortgage Solutions presents Issue 372 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.

The events of 2024 can best be put into perspective by quoting that opening line authored by Charles Dickens in his famed book: A Tale of Two Cities:

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”

The financial markets experienced irrational exuberance like never before, and created epic wealth like there is no tomorrow. We watched in despair the wretchedness, hopelessness, and destructive nature of humans at war. We were given hope for the exciting new technologies being developed, while at the same time being reminded of the agonizing consequences of historic manias and speculative bubbles. There was an awareness that we live in a society that is becoming increasingly relaxed with gambling, drug use, and violence. We witnessed two assassination attempts on our next president, and the cold-blooded murder of the UnitedHealthcare CEO. Yes, 2024 was a year of the Good, the Bad, and the Ugly.?

The two financial events that set the stage for the equity markets to produce their second consecutive year of 20+% gains were the Federal Reserve’s monetary policy pivot (from tightening to easing) and Donald Trump's landslide victory as our next president.?

As a long-time student of the markets and active Fed watcher, I still have a hard time wrapping my head around the Fed’s decision to lower interest rates by 100 basis points in three months. Let’s go back to September 17th last year, the day before the Fed executed their “shock and awe” 50 basis point cut on September 18th. The S&P 500 was up 19% y-t-d, after being up over 20% in 2023. The bank index was up 20% and the Broker/Dealer Index was up 24%. The darling of Wall Street, Nvidia, was up 133%, while Bitcoin was up 41% y-t-d. Gold and Silver were both up 25% and 29%, respectively. Despite raging bull markets, the Fed somehow believed it was sound monetary policy to cut interest rates by 50 basis points.?

Fast forward to November 6th. Trump just swept the election, and the markets were in a manic post-election rally.? The S&P 500 was now up 26%, the Banks 45%, Broker/Dealers up 50%, Nvidia up 194%, Bitcoin up 74%, Gold and Silver up 29% and 31% respectively y-t-d. The next day, at the November 7th FOMC meeting, the Fed decided to cut interest rates again, completely disregarding the highly speculative markets.?

Fast forward to December 17th. The S&P 500 was now up 29% y-t-d, Banks were up 40%, Broker/Dealers up 49%, Nvidia was up 163%, Bitcoin has soared to 150% on the year, with both Gold and Silver up 28% y-t-d. Investment-grade and high-yield spreads were at their lowest levels since 2007. Q3 GDP accelerated to 3.1%, with core CPI flatlining at 3.3%. The next day, December 18th, the FOMC decided on another misguided interest rate cut. Three cuts, 100 basis points, in three months, with a rip-roaring bull market, a strong economy, full employment, and inflation above their 2% target. Lowering interest rates is a tool the Fed normally uses to help stimulate a slowing economy. If you are confused, don’t feel like the Lone Ranger!

The total value of all securities (debt and equity) inflated $24 trillion (or 19%) over the previous year, to a record $153 trillion. Total Securities ended the year at 522% of GDP, dwarfing cycle peaks 375% (2007) and 357% (2000).?

Household Net Worth (Assets less Liabilities) inflated $17 trillion (or 11%) to a record $168 trillion thru Q3 2024, which equates to 575% of GDP, above previous cycle peaks 488% (2007) and 444% (2000).?

HOUSING

The good news is that there is a lot more supply on the market. The bad news is that a lot of that supply is stale, sitting unsold for much longer than usual. Active listings in November were 12% higher than they were a year ago and hit the highest level since 2020. However, more than half of those homes have sat on the market for at least 60 days without going under contract of sale. A lot of listings are either stale or uninhabitable (hurricane-damaged). The typical home that did go under contract did so in 43 days…, the slowest November since 2019. The Spring and Summer selling season is just around the corner…better days ahead.?

THE STOCK MARKET

The S&P 500 just posted back-to-back yearly gains of more than 20% for the first time since 1998. The bull run in 2024 was driven by the Fed’s interest rate cutting cycle, the artificial intelligence (AI) craze, and Donald Trump’s decisive election victory. The year-end closing price at 5,882 was about 400 points higher than the average Wall Street forecast for 2024. In the year ahead, the lowest forecast I have seen is 5,500 and the highest is 7,000. Most of the Wall Street forecasts are in the 6,500 to 6,700 region.?

Not that it has any predictive value: But the Santa Claus rally was a bust this year, with the S&P 500 losing 1.7% over the seven-trading day period. Also, one of the most successful investors of all time, Warren Buffet, is going into 2025 with the biggest?cash position (T-Bills) in 30 years. I am also keeping an eye on the U.S. Dollar, which has moved higher for five consecutive weeks, as well as for thirteen of the last fourteen weeks. The employment report this Friday should be important for all markets.?

Of note, investors plowed more than $1 trillion into U.S. -based exchange-traded funds in 2024, shattering the previous record set three years ago. Total assets in U.S. -based ETF’s reached a record $10.6 trillion - an increase of 30% from the start of 2024.? ?

For the year: The S&P 500 posted 57 record highs (averaging about one per week) and was up 23%, the Dow was up 13%, the Nasdaq 100 was up 25%, the Russell was up 10%, and Gold was up 25% (best gain in 14 years). Bitcoin was the big winner, up over 100%, with the launch of the iShares Bitcoin Trust smashing industry records and growing to more than $50 billion in assets in just 11months. No ETF has ever had a better debut.?

Technical levels for the S&P 500: Support starts near 5,830 and extends down toward 5,700. Resistance starts near 5,950 and extends upward toward 6,000. I’m still holding a bearish starter position, with a stop-loss just above 6,100. I expect a 10% correction.

THE BOND MARKET

The 10-year Treasury traded flat last week, with a low yield at 4.50%, a high yield at 4.63%, and a close at 4.60%, down 2 basis points. As mentioned before, I see a maximum potential near 4.75% to cap any farther selling pressure. In the months ahead, I see nice rally that can take the 10-year Treasury yield lower towards 4.00%.?

Competition in the fixed income market was fierce last year, with corporate bond and leveraged loan issuance climbing over 30% y-o-y to nearly $8 trillion. The municipal bond market saw over $507 billion of new debt issued in 2024, up 31% from 2023. Also, money market funds (with yields equaling Treasuries), expanded $873 billion last year.? ?

Be careful in your hunt for yields. Municipal bonds sold by colleges and charter schools became distressed at record levels in 2024, as the amount of defaulted state and local government debt hit a three-year high. Last year was the worst year for municipal defaults since 2021. Also, credit card lenders wrote off $46 billion in seriously delinquent loan balances in the first nine months of 2024, up 50% from the same period in the year prior and the highest level in 14 years.?

In terms of Fed monetary policy going forward, the market is looking for a long “pause” period with the next interest rate cut not coming until mid-year. The FOMC meeting last month gave projections that increased their inflation outlook for 2025 and 2026, and sees the core inflation rate not hitting its 2% target until 2027. The bond market vigilantes have been telegraphing a message to the Federal Reserve, with a 100-basis point rise in the 10-year Treasury yield during the past three months: “We don’t need these cuts.”?

The only other time that the 10-year Treasury yield saw a larger increase in rates in such a short period of time, was in 1981. Back then, Fed Chairman Paul Volcker was fighting a 20% inflation rate.?

With fed funds likely to remain in the current 4.25%-4.50% range in the months ahead, money market funds and risk-free T-Bills should continue to stay in a similar range. I’m sticking with my “T-Bill and Chill” strategy for the time being.?

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.