Tomorrow is Election Day, I’m sure you have voted or will likely get out tomorrow to the polls. We will see what our government looks like after that, from local elections to national elections.
In the meantime, there is another “ceasefire” potential in the middle east.
My guess is nothing happens until after tomorrow’s elections.
On the financial front, it looks like tech stocks are getting hammered and coming back to reality. As you know, we have been underweight those stocks all year and continue to be so.
Here is the chart of the 100 largest “non-financial” companies traded on the NASDAQ. The Mag 7 and many more. This group is down roughly 10% from its highs earlier this month. Meanwhile the RSP (Equal-weight S&P 500) is back near its highs and has acted quite differently than the NASDAQ, trading just about 1% off its annual high.
Bonds, which I’ve mentioned before have seen a tremendous bid since the NASDAQ peaked.
I’ve said that I think bonds are an asymmetric return asset. Unlike the stock market (which could have a 2-to-1 downside profile), bonds could have a 2-to-1 upside profile. Could the 10-year treasury hit 6%? Sure, but I don’t think it would stay there very long. Today it is down below 4.9%, dropping from its high in early October of 5.3%.
Will the rate keep going down? I don’t know for sure, but I would guess it is more likely to go down than go up (just my thought).
If we get a resolution to the Middle East, we could see oil come back down into the 70’s and that would likely help the inflation picture. If inflation comes down, you would expect mortgage rates to come down and that might help the housing industry, which is close to stall speed right now. In fact, there is new legislation in the house called the “Move Act” that would allow people with Fannie Mae and Freddie Mac mortgages to take them with them and buy a new house (cue the “it’s about time” chorus).
The problem we currently have is there are many people who have low interest rate mortgages who don’t want to trade those in for a 7%+ rate. As a matter of fact, roughly 40% of people own their home outright. Of the other 60%, here is the breakdown of rates paid today.
Around 40% of those with mortgages pay 4% or less on their mortgages. It’s not hard to see why the housing market is largely frozen, as 40% have no mortgages (and are not likely to want one), and another 40% of those that do have a mortgage pay less than 4%. That roughly 65% of all houses that will likely not move because of interest rates. And then there are capital gains considerations on top of that, as housing prices have so materially increased in recent years, while the capital gains exemption amount for house sales has remained frozen.
Will the ‘Move Act’ help? I would think so. Probably not good for the Freddie and Fannie, but is there a difference for them if people continue to pay off their mortgage and not move? Same money, but houses change hands, allowing younger people the opportunity to buy their first house or move up to a bigger house if their family needs it.
Finally, back on the topic of AI spending, it appears as if people are pulling back their expectations for now. Our good friend Professor Jeremy Siegel made a comment about it this morning.
Sorry for the small print…Spending and profitability will be the question that needs to be answered over the next couple years, and how that is answered will dictate how the AI companies and chip companies perform. Chip companies have always been in a cyclical business. Should we expect things to be different this time? It’s always a dangerous thing to say!
That’s all I have for this week, as always, please let us know if you have questions or concerns. Happy to have a conversation about this or any other topic. Have a good rest of the week.