This week on “Inside the Economy”, we discuss the U.S. economy and the stock market. With the most recent year over year inflation number coming in lower than expected, what does that mean for the U.S. economy moving forward and will inflation continue to soften as we move into 2023? The stock market has shown some life over the past 2 weeks, but how do the Mid Term elections and a strong dollar fit into the equation? Tune in to learn about this and more!
Key Takeaways:
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- Oil hits $88 a barrel
- Unemployment ticks up slightly
- New mortgage rates above 7
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Full Transcript:
Welcome to another edition of Inside the Economy. My name is Cody Campbell. Thank you for watching. Those who needed a break from Larry Howes, I’m here to mix things up. And for those long-time viewers who love Larry, don’t you worry. He will be back on the next segment. How lucky am I to be doing this edition? In the last two weeks we’ve had a Fed rate hike of 75 basis points, midterm elections, and a lower-than-expected inflation report. We’ve also had liquidity crisis in the crypto markets and my daughter turned two months old. Needless to say, there’s great deal I’d like to cover so let’s get started. Hopefully, I can entertain enlighten and leave you better than I found you today.
It was an action packed two weeks for economic data. Headline inflation came in lower than expected at 7.7% year over year. And core, which excludes the energy and the food component came in at 6.3% year over year. Funny how markets work. In February, CPI was 7.9% year over year and there was quite the negative reaction, but not this month. Headline CPI at 7.7%. What a rally we saw in the equity and bond markets on Thursday, November 10th.
If you missed it, the Nasdaq was up 7.4% and the S&P was up almost 5.5%. It’s safe to say investors are hoping and speculating the Fed will pump the breaks going into 2023. I was curious where a 7.4% move in the Nasdaq ranked all time expecting it to be top 3 or top 5. However, it was only number 14. Anyways, back to the data.
Unemployment ticked up. No surprise as slower growth is upon us. Social media company Twitter has a new owner and he immediately laid off 3,700 people. Some I hear he’s already asking to come back. Internally, we were talking about how Twitter layoffs would be the first of many in the tech sector. And sure enough, Meta announced over 11,000 layoffs, Snapchat, Pinterest, Coinbase, Netflix, Microsoft, and many more all following suit.
Moving on, oil remains in the high 80s. The two-year treasury has come off its highs, but still elevated at 4.4% as again, the market tries to digest the inflation data and speculate on the Fed’s next move. Mortgage rates hanging in there around 7%. Still an unbelievable increase in rates over the past 12 months. And I don’t know if the non-home buyers realize the impact of this, so I’m going to try to break it down with some mortgage math.
Last November 2021, you could get a 30-year fixed-rate mortgage for around 3%. Using the median US home price at $400,000 assuming a 20% down payment on that home, your actual mortgage would be about $318,000. Your monthly payment of principal and interest not including taxes and insurance would be $1,335 per month. Now, let’s run through today’s number. 7% mortgage rate which is a 133% increase year over year. Median home prices today for that same exact home are around 450,000, a 15% increase. So, with a 20% down payment, your mortgage balance would be $364,000. Your monthly principal and interest today, $2,409 per month. That’s an 80% increase in payment for the same exact house, 80%. Now, an 80% seems high but what does that really mean? Let me try to articulate it this way. There are no hard and fast rules in lending, but if you have over a 720-credit score and the principal interest taxes and insurance is around 28% or so of your gross income, you are considered a prime borrower. Hence, the term subprime if borrowers don’t meet these standards.
Last year, to adhere to the 28% of your gross income rule, you would have to make about $58,000 based on the principal and interest payment. This year, your income would have to be $103,000 to maintain that same 28% ratio. No wonder many people are being priced out of this market. Last year, first-time homebuyers were losing every bid to more competitive buyers. Now, the majority of them can’t afford the monthly payment because their income didn’t go up 80%.
I think we will continue to see softness in the housing market rightfully so given how low rates were. One last thing I’ll say on housing, we are seeing more cash deals because buyers who can afford it, don’t want a 7% mortgage and the tradeoff of having a mortgage versus investing is less appealing than it was a year ago.
Circling back to the CPI or consumer price index report, inflation is still high. Fuel, airline tickets, dairy, electricity are all up significantly year over year but inflation is coming down at least for now. Again, inflation does not impact everyone equally. The economy is different for everyone. Depending on your region, industry, lifestyle. Your economy may not be the same as mine. Shelter or rents is a big component of CPI and if you own your own home or if you have a fixed-rate mortgage, you are more insulated from some of these high figures.
What causes inflation? Well, of course, the answer is the COVID disruption, but if we look deeper, is it tied to the supply chain issues from shutting the economy? Is it from the energy prices in the war or invasion of Ukraine? Was it the $5 trillion dollars of fiscal stimulus or liquidity that Congress injected through payroll protection loans and other checks? The answer is all of the above.
Now, food for thought, on fiscal stimulus and employment. Let me take you back to 2008 in the great financial crisis. We lost 9-million jobs in Congress was slow, but they did finally pass the American Recovery and Reinvestment Act for $800 billion dollars to support and stimulate the economy. Now many argued at the time 800-billion was too much. Many argued we needed more. Congress ultimately decided 800 billion was all that we were going to get.
Guess how long it took to get the 9 million jobs that we lost back. 7 years. 7 years of slow growth and careers disrupted. Now fast forward to 2020 COVID hits. We lose 22 million jobs overnight. Congress acts right away with $2 trillion dollars and over the course of the past two years, we’ve seen almost a total of 5 trillion flow into the system. How long did a take us to get back 22 million jobs? Two years. So, from a labor in human perspective, are we better off today than after 2008? Do we have higher inflation? Do we have more things to figure out? Of course.
Okay, moving on. The broader market indices are seeing a relief rally into the end of the year after the positive inflation news and potential speculation, the Fed will slow down in the 2023. The Dow is down 4% looking at the last 12 months and the S&P still down around 13% with the Nasdaq bringing up the rear at down 28%.
In other news, Meta, which used to be called Facebook, has seen a dramatic decline in its market value. A push to virtual reality and other digital innovations haven’t panned out quite as Zuckerberg had hoped. This is the theme we saw during the last 2 years. Look at Carvana who is an online used car dealer, a great idea, one that received a lot of hype after COVID. Still a better alternative than going to a dealership, but in less than a year, it’s down 98% from its peak. Safe to say, they invested too big too soon and the used car or car supply in general has really hurt their growth and financials.
Other names such as Peloton and many investments in growth investors, Cathy Woods Ark Innovation Funds have seen their bubbles pop this year. In my opinion, this is a result of lots of liquidity and money in the system after COVID, not necessarily bad ideas. Visionaries of next gen technology and innovation disruptions were able to raise billions and billions of dollars. No questions asked given last year’s economic environment. After a quick shift to higher cost of money, tighter financial conditions, these pockets of the market have dried up and some have evaporated.
Another great example is FTX, a crypto exchange. If you watch Major League baseball at all this past season, all the empires had FTX on their shirt. FTX also bought the naming rights to where the Miami Heat play, and many of you know Tom Brady, one of their main spokespersons. FTX announced liquidity issues earlier last week and then ultimately filed for Chapter 11 bankruptcy. Commingling of assets and other below board practices were probably going on and we will continue to monitor the contagion effect in the crypto and private markets.
Now, topic I want to discuss is the US dollar. It’s been on a historical run to the upside over the past year. If you didn’t know, the dollar index tracks the strength of the dollar against 6 different currencies. The Euro, the Pound, the Canadian dollar, Japanese Yen, Swedish Corona, and the Swiss Franc. The dollar has been extremely strong coming out of the pandemic and it has a huge impact on international investing. The dollar index is a great tool when used with other indicators to determine when and how international exposure we should have in a portfolio.
Just look at this chart. How inversely correlated the dollar is compared to the emerging markets. Year to date they’ve gone in opposite directions and the weakness in the dollar recently has spurred a rally in the emerging markets. Again, something we will be closely watching into the end of the year.
Alright, let’s end on a positive note. Regardless of your political affiliation or how you voted last week, history is on our side. The orange line on this chart basically represents the intra-year decline during midterm election years. The gray line on this chart shows the 1-year returns after the midterm election years. So, since 1950, there hasn’t been a negative year performance after the midterms and often it’s been in the high 20% even 30% territory. Maybe better summarize in this chart here, pre-midterm years less than stellar. All years are pretty good, but the 12 months following the midterms has seen some fantastic returns. Now, past performance is no guarantee of future results but one can hope.
If you have questions, send them to Info@SHJWealthAdvisors.com. We’re always happy to help and listen to feedback. My name is Cody Campbell. Go be the change you want to see in the world. Thank you for watching.
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