I’m fortunate this week to be in Spain with my wife and friends. There’s less time to write, but more time to catch-up on reading and think about things that may drive longer pieces later, but for now:
Market Update
This post by Jeremy Siegel covers a lot. The economy is strong despite tighter monetary policy. Bank deposits are growing, which is good. He’s not concerned about U.S. stocks, liking corporate earnings and investor caution due to geopolitics and the election. There’s not much to report on growth vs. value, but small caps would likely do better in a lower rate environment.
Yields
He shared some thoughts on yield that got me thinking. Given deficit concerns and the strong economy and labor market, he wonders if we should expect a higher neutral interest rate and a 10-year yield at 4.75% (up from 4.2% now).
Remember that mortgage rates are the 10-year yield plus a spread usually around 1.5% (but higher now), so we might be facing mortgage rates in the 6’s and 7’s versus 5’s and 6’s (something my friends over at Narwhal Capital have discussed in their morning market briefings).
Real Estate
This just adds to my confusion about why residential real estate isn’t struggling more. Higher mortgage rates and skyrocketing insurance costs should hurt prices, but they’re not. Real estate prices and transaction volumes are steady.
Maybe it’s the wealth effect, the idea that when stocks and home values are up people feel richer and spend more. Not everyone buys into the wealth effect. Cash deals are higher than pre-Covid, which supports it as a possibility. It’s worth watching, but I would be cautious with residential real estate.
New Lost Decade Calls
We’re getting some Wall Street lost decade calls, meaning analysts projecting weak U.S. stock market returns for the next decade. We’ve seen this before. The new normal and all that nonsense that came out in 2009 only to see U.S. stocks crush expectations.
Thoughtful projections are an important step in asset allocating, but they’re not beacons of accuracy.
One thing these new pessimists have going for them is that in 2009 stocks were coming off a generational low and now we’re 15 years into a secular bull market. Also, valuations weren’t stretched like they are today.
Broadly diversify and ignore the noise.
Also, remember market history. The path to weak stock market returns over a decade likely won’t be low single digit returns every year, but strong years mixed in with very bad ones. In the 2000’s, the S&P 500 was down 9%, but the positive return years averaged +13.16%. Have a rebalancing strategy for when those declines happen.
