“Hey, here is where I am, and I’m here because I steered my horse here” ... Chris Gardner, author of “The Pursuit of Happyness”

In China, property markets remain in a brutal state. While Chinese Industrial Production and Retail sales are lagging behind historical growth trends. Here in the US, manufacturing activity still looks weak and results aren’t much better in the Eurozone. Financial conditions have slowed activity further, and the full effects of tightening in the US “have yet to be felt”. Even though monetary policy is starting to ease up around the world, that comes with slow economic activity amidst restrictive policy rates for huge areas of the global economy.

Here in the U.S.;

• Economic Growth Will Slow In The Coming Quarters

While 3Q23 growth showed the economy expanded at a 4.9% annualized rate, it is important to remember that the GDP report is backward-looking. From my vantage point, many real-time indicators I follow suggest that economic growth is decelerating, and tighter financial conditions will only exacerbate this trend. I’m not alone in that view as the Conference’s Board’s forecast calls for GDP to fall to 0.8 percent in 2024.

Why? First, manufacturing activity remains sluggish. The latest ISM Manufacturing Survey reported that activity remained in contractionary territory for the 12th straight month, falling to its fourth lowest level (ex-COVID) since 2009.

Second, consumer confidence fell for the third month to its lowest level since April. This weak data represents a downtrend that has been in place for months and is now in its second year.

I’ve been saying it for a while, (and I’ve been wrong) but poor sentiment will eventually spill over into consumer spending. The National Retail Federation expects holiday spending to rise 3-4%—its slowest pace in five years. Third, elevated interest rates are hampering the interest rate-sensitive sectors of the economy. Housing affordability is at the lowest level since the early 1980s.

Then there are the new concerns over consumer debt. During the pandemic, pauses on required repayments basically ended delinquencies on student loans. Those repayments have now almost entirely restarted, but serious delinquency rates on student loans remain low (repayments didn’t resume until September). Other serious delinquencies are rising though. Credit card serious delinquency rates are below pre-COVID norms but rose 1.4% quarter over quarter and 1.8% year over year. 90-day+ delinquency rates for “other” lending (consumer credit categories not counted in the other categories) are at the highest levels since 2015.

Total serious delinquency rates for auto lending remain constructive, while mortgages are similar. But trouble is brewing. The share of loans that are newly delinquent is rising broadly. For credit cards, it’s the highest since Q3 of 2011. For auto and “other” loans, newly delinquent loans are back to pre-COVID norms while they’re historically low for HELOCs and mortgages (with the latter rising).

Credit utilization (owed debt as a percentage of the available balance) is rising steadily for credit cards, a sign of a consumer that is taking on more debt than is healthy, while HELOC utilization is also starting to rise for the first time since the mid-2000s (albeit from much lower levels).

Existing home sales have slowed to the weakest level since 2010 and loan demand fell for the fifth consecutive quarter in the latest Senior Loan Officer Survey.

• Labor Market Strength Is Fading

Despite the Fed’s aggressive rate hikes, the labor market has remained resilient. Corporations are loathed to fire workers they had such a hard time acquiring after the pandemic. There are cracks forming that signal weakness ahead. First, the employment subsector within the ISM Manufacturing report declined into contraction territory for the third time in four months as commentary within the report suggested that businesses are having an easier time finding prospective employees.

Initial jobless claims hover near cyclical lows, continuing claims have risen to a six-month high, and the duration of those unemployed is climbing, suggesting that it is taking longer to find jobs. The percentage of consumers who viewed jobs as “plentiful” declined to the lowest level since March 2021. The slowdown in hiring should continue, with the potential for job growth turning abysmal in 2024.

• Disinflationary Trend Remains Intact

Inflation has eased considerably from its peak last year. While it’s trending in the right direction, Fed policymakers are not ready to claim victory given ‘core’ inflation remains above their 2.0% target. The FOMC keeps harping on that message yet it appears some are doubting their stance. I’ve been saying this since inflation appeared on the scene, The FED is not going to back off of their target. In addition, they aren’t going to cut rates until months after the target is reached.

Suffice it to say this entire issue should have less of an impact on stocks going forward. That assumes the “market” has digested the “higher for longer” environment for interest rates. However with forecasts for rate cuts as part of the commentary for next year, that is debatable.

The list of global issues dwarfs the problem the US is facing.

At the top of that list is the potential for “recession”. Europe’s CPI and GDP are rolling over as higher interest rates are working globally. The Eurozone is nearing or already in recession. European CPI was in line to slightly lower than expected, while Europe-wide GDP was barely above zero for 3Q year over year and down slightly quarter over quarter. Canada is also trending towards recession. China services and manufacturing PMI came in slightly weaker than anticipated as well, though many expect China to re-accelerate a bit heading into 2024 due to fiscal spending. This global backdrop won’t be positive for the U.S. corporate earning picture, and earnings drive stock prices.

The Economic situation here in the US and abroad is ever-evolving. If things go just right and the U.S. economy doesn’t weaken too much then the cautionary forecasts can be adjusted to a more positive stance. However, the obstacles are still there and by some accounts are mounting up. There remains a contingent that believes ALL of the issues will disappear when the Fed is out of the picture. The concerns and constant chatter about the Fed borders on absurdity, as it dismisses all of the other problems that the economy is facing.

While rising interest rates and aggressive monetary policy have been a headwind for the equity and bond market over recent months, investors believe all will be well when the Fed ends the tightening cycle. Market participants should be wary of what they wish for. First, history shows the stock market is typically trendless between the last rate hike and the first rate cut.

Secondly, after the first rate cut stock prices tend to weaken. According to Credit Suisse, the S&P 500 usually falls in the six months after the Fed’s first rate cut. There is a multitude of factors that will dictate market action before, during, and after rate cuts so trying to get positioned for this eventuality today is pointless. That is why I’m not interested in joining the parade of analysts who are literally begging for the Fed to cut interest rates.

There are a number of scenarios where all could go right and change the storm clouds to a more tranquil scene. Given the uncertainty there is but one way to approach this investment landscape — STAY BALANCED.

The Week On Wall Street

After two weeks of gains (7% for the S&P) that took all of the indices well off of their three-month lows, the S&P 500 started Monday in the red. The dip-buyers showed up and turned the entire market around. The S&P closed the session flat on the day by posting a modest 3-point loss.

A lower CPI print changed the entire near-term sentiment picture. A strong Gap Up opening set the stage for an advance that took the S&P to a 2+% gain. That made it 10 out of the last 12 trading days with gains. However, this Tuesday was something different. Every index and all eleven sectors were higher. 93% of the S&P 500 was in the green, advancers led declined 15 to 1, and the Russell 2000 added 5+% for the day.

There was no giveback in the last three trading days of the week as the indices did a good job of digesting the gains. The S&P 500, DJIA, and the NASDAQ ran their weekly winning streak to three.

The Economy

CPI was unchanged in October, and the core rate was up 0.2%, cooler than anticipated. Those compare to respective gains of 0.4% and 0.3% in September and 0.6% and 0.3% in August. The 12-month rate slowed to 3.2% y/y on the headline, versus 3.7% y/y previously. The core slipped to a 4.0% y/y rate from the prior 4.1% y/y pace. A lot of progress has been made since hitting 40-year highs of 9.1% y/y in June 2022, and 6.6% y/y for the core in September 2022. But the mission has not been accomplished yet, and the talk that is surfacing about any rate CUTS is premature. If/When inflation gets to 2%, the FED will sit on that for months. They do NOT want to be caught cutting rates and then see inflation return. That would be a disaster and they aren’t going there.

Two caveats — the economy crumbles and or the administration puts enormous pressure to cut rates during an election year. Without a crumbling economy, the latter would be a huge mistake.

Nevertheless, this is a positive development in the short term that will probably keep the Fed on the sidelines until next year, and that is a tailwind for the market in Q4.

More upbeat news on Inflation

PPI undershot assumptions in October with a 0.5% headline drop and a lean 0.1% for the core, leaving a downside surprise after three consecutive upside surprises in Q3. Today’s weak PPI figures follow the reported flat October CPI headline with a lean 0.2% core gain.

NFIB Small Business Optimism Index decreased 0.1 points in October to 90.7, marking the 22nd month below the 50-year average. The last time the Optimism Index was at or above the average was December 2021. NFIB Chief Economist Bill Dunkelberg;

This month marks the 50th anniversary of NFIB’s small business economic survey. The October data shows that small businesses are still recovering, and owners are not optimistic about better business conditions. Small business owners are not growing their inventories as labor and energy costs are not falling, making it a gloomy outlook for the remainder of the year.”

Manufacturing

The Empire State manufacturing index bounced 13.7 points to 9.1 in November, better than expected, after dropping 6.5 points to -4.6 in October. It is the best reading since April. However, the components were mixed and not as optimistic as the headline suggests. Although the current conditions index improved, expectations dropped a massive 24 points month over month.

CONSUMER

Initial claims climbed to a 3-month high of 231k in the second week of November from 218k, versus a 9-month low of 200k in the October BLS survey week. Continuing claims rose 32k to a 2-year high of 1,865k from a 6-month high of 1,833k versus an 8-month low of 1,658k in September. The rise in initial and continuing claims since the October survey week implies downside risk for analyst estimates of 140k November nonfarm payrolls.

Retail sales slightly undershot assumptions, with a 0.1% October headline drop.