One that’s counterintuitive for those on the “outside.” One that’s hard to wrap your head around. But once you do, you’ll become a much better trader.
Narrative drives price in the short/medium term. Not fundamentals…
The narrative flavor of the day is artificial intelligence…
Remember, Wall Street is in the business of making money. Nothing more. Nothing less. (See last week’s missive.)
So companies’ management teams looking to see their stock price go up hunt for the new narrative.
If you can identify companies looking to take advantage… then you stand to make a lot of money too.”
Most companies know how the game is played. We mentioned a few of them (you can read that here and here).
Any and every company mentioned AI as many times as possible in press releases and conference calls. Shares would rise no matter what. Even IHOP got in on the AI narrative game.
Yup, that IHOP.
However, the markets aren’t rising as much anymore when companies mention AI.
With the Nasdaq down 5% so far this September… Wall Street needs a narrative to help kickstart the stock market again. AI isn’t doing it.
“For stock investors for much of this year, the trillion-dollar AI promise has masked a big threat in this era of Federal Reserve hawkishness: Real-world borrowing costs have jumped across Corporate America.
Now Wall Street is fretting over the monetary danger in a week that Jerome Powell signaled his resolve once again to keep the policy stance tight — sparking a rout across Big Tech and beyond.
His tool of choice to cool the still-hot US economy: Ensuring interest rates adjusted for inflation — seen as true cost of money for borrowers — stay elevated. Real yields, which touched decade-highs this week, need to stay meaningfully positive “for some time,” the Fed chief said at the policy gathering.
It’s a chilling message for the top-heavy US equity market. Double-digit gains this year have been fueled by optimism that nascent technologies such as artificial intelligence will unlock a new wave of growth for technology companies, justifying the sector’s eye-watering valuations. Yet skepticism is setting in as the cost of capital climbs, threatening to pressure companies big and small.”
The Federal Reserve keeps telling the market it’ll keep rates higher for longer.
The market hasn’t believed the Fed since the beginning. They’ve gotten it wrong every step of the way.
But that didn’t matter because the stock market loves a good hype story. AI was there to save the day.
Now, Wall Street needs to find something else to sell. Without a new narrative, stocks are under a lot of pressure.
It’s a fantasy that Wall Street will do whatever means necessary to keep up. Expect more bullish headlines to make you forget about all the crosscurrents we’ve been warning about — including higher rates for longer.
2) Regret & False Promises
You’d think rationale and “running the numbers” would play a big part in making the biggest purchase of your life.
It’s anything but when it comes to buying a house.
The average American doesn’t think about the all-in cost of buying a home.
From taxes to capital expenditures to interest. The actual cost of one’s home is much more than the number they put a bid in for.
That’s where realtors come in.
Realtors help their clients find the perfect home. They take the glass half-full perspective. They’re the cheerleaders. It’s their job to help the client — from finding the home through closing.
Their commission comes after the home purchase. So it makes sense.
Find your client their dream home. Collect your commission. Win-win.
What’s happened over the last year or so are realtors giving misguided advice about the markets.
They’re telling them “it’s okay to buy your house today at these high mortgage rates because you’ll be able to refinance in the next year or two.”
That’s what a recent study from U.S. News & World Report found.
“Most recent homebuyers (82%) were assured they could "buy now and refinance later."They most often heard this from their mortgage loan officer (63%) and/or their real estate agent (60%). But 13% say they won't be able to keep making payments if they can't refinance – among borrowers with an adjustable-rate mortgage, that figure is higher at 16%.”
The average American doesn’t know the first thing about financial markets. They don’t know that the world of finance and any investment’s risk-premium is based off of the 10-year U.S. bond yield.
It’s why mortgage payments have skyrocketed. Redfin reports the typical mortgage payment is up 20% from a year ago. Here’s a visualization of how fast they’ve run.
So there’s an implicit trust one takes with their realtor. They’re looked at as the industry experts.
And they are… sometimes.
But they’re not financial experts nor do they have a fiduciary responsibility to their client.
So there’s something seriously wrong here. The best advice the average American can get… is from another average American.
If the collective whole of the stock and bond market have gotten the direction of rates wrong for the past 15 months… can we really blame realtors for getting it wrong too? No.
Either way… there’s got to be some responsibility borne by the homebuyer.
Back to the study:
“Over half of recent buyers (55%) regret taking out a mortgage when rates were high.
50% of all respondents feel trapped by their current mortgage rate/monthly payment, including 56% of first-time buyers and 36% of repeat buyers.”
We need more financial education. From grade school to the real world.
The average homebuyer would be a little less trapped and remorseful if there was someone helping them.
3) The U.S. Consumer
Another week. Another financial crosscurrent.
Everywhere we turn we see how fragile the U.S. consumer is.
Meanwhile, Bloomberg just put out an article on how most Americans have less savings than when the pandemic began. From Bloomberg (emphasis added):
“Americans outside the wealthiest 20% of the country have run out of extra savings and now have less cash on hand than they did when the pandemic began, according to the latest Federal Reserve study of household finances.
For the bottom 80% of households by income, bank deposits and other liquid assets were lower in June this year than they were in March 2020, after adjustment for inflation.
All income groups have seen their balances decline in real terms from a peak in 2021, according to the Fed survey. But among the wealthiest one-fifth of households, cash savings are still about 8% above their level when Covid hit. By contrast, the poorest two-fifths of Americans have seen an 8% drop in that period. And the next 40% — a group that roughly corresponds with the US middle class — saw their cash savings drop below pre-pandemic levels in the last quarter.”
Savings are depleted. Debts are at all-time highs. The data is undeniable.
But on the contrary… Americans are plowing trillions into money market funds and U.S. Treasuries.
“U.S. households have made big moves in the roughly $25 trillion U.S. Treasury market since the Federal Reserve began its campaign of rate hikes last year.
Their holdings have shot up to about $2.5 trillion from less than $1 trillion when the Fed began raising rates in 2022, to reach the highest level in the past 25 years, according to Torsten Slok, chief economist at Apollo Global Management.
U.S. households now own more Treasury securities than any time in the past 25 years. FFUNDS, HAVER, APOLLO CHIEF ECONOMIST
“The bottom line is that US households and real money are finding current levels of US yields attractive,” Slok wrote in emailed commentary Friday.”
Meanwhile, dollars in money-market funds are at all-time highs — reaching almost $6 trillion. This chart looks like a meme-stock.
These sorts of conflicting datapoints and crosscurrents are what’s confusing most economists and financial experts. It’s why you see the bull / bear divide pretty much split down the middle.
We’re not sure what’s going to happen. But what we do know is these crosscurrents are picking up steam.
So do what you need to do with your portfolios to sleep well at night.
Good investing,
Lance
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You have covered some great points here on the bear-bull divide rising from conflicting economic data points. Great piece
Great coverage, thank you!