🧭 The Weekly Scoop

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Here’s what you need to know this week.…

This week has been all over the place. It’s not really worth it to try and rationalize the movements in stocks and bonds. The most likely drivers are emotion, uncertainty, and different trading imbalances.

The economy is still hanging on better than anyone really thought it would, but it’s pretty clear the cracks are starting to widen. The strain of rapidly rising borrowing costs has been evident in the housing market for months, and it’s starting to show up in the most important thing for the economy: consumer spending.

Government reports like GDP, jobs reports, and retail sales are helpful in spotting trends, but the most valuable information comes from corporate executives watching and responding in real-time. Earlier in the year, CEOs were pretty confident. This week, they’ve started raising some red flags.

People have less savings. They’re falling behind on their payments for their homes, cars, and credit cards at an accelerating rate. They’re shifting spending to cheaper brands. Even travel and leisure spending, the one booming sector all year, has started to show cracks. Airlines and hotels still see growth from their international travel (wealthier segment), but domestic and budget lines are losing steam. Retailers are planning for significant discounts for the holidays.

The good news? Things aren’t terrible. Unemployment is low. Market sentiment is wack. There’s a reasonable chance rates come down from here, and the stock market rallies. You know we don’t believe in short-term predictions, though.

🐂 Reasons to be optimistic:

• The US economy was booming this summer. The Commerce Department reported US gross domestic product grew 4.9% in the third quarter, [🤓] the fastest economic growth since 2021. Consumer spending, which powers two-thirds of the economy, was the most significant driver. Despite higher living costs and rising borrowing costs, Americans kept spending. It’s starting to look like that spending momentum has slowed, though, posing risks for the end of the year.

• The US economy is still growing. S&P Global’s composite Purchasing Managers Index (PMI), which tracks manufacturing and service sectors, rose to the highest level in three months in October. This growth comes despite expectations that interest rate hikes would lead to a recession and higher unemployment. Manufacturing snapped out of a downturn, and the services industry accelerated. European economies aren’t doing as well. Europe's composite PMI fell to a three-year low in October, signaling worry that the continent could face a recession.

• Layoffs still haven’t picked up much. The Labor Department reported initial unemployment claims rose slightly last week to 210,000 but are still hovering near normal levels. Unemployment is still at historic lows, and there are still close to 1.5 jobs available for every unemployed person.

• Bitcoin is making a comeback. On Monday, its price reached over $35,000, more than doubling its price from the start of the year. Confidence in cryptocurrency is gaining after investment firms BlackRock and Grayscale made progress toward launching a Bitcoin-related Exchange Traded Fund (ETF). ETFs are a big step for cryptocurrency to join mainstream finance and access a much larger investor base.

🐻 Reasons to be pessimistic:

• The US government keeps spending more money than it takes in, while borrowing costs rise. According to the Congressional Budget Office, the federal budget deficit for 2023 reached $1.7 trillion. This matters because when a government runs a deficit, it needs to borrow money to cover its expenses. While borrowing costs for the government have been nearly free for the past decade, they’re now rising considerably. Congress only has a few weeks to agree to a spending package before the government shuts down.

• Americans are having trouble paying for their cars. According to Fitch Ratings, 6.11% of subprime auto borrowers were at least 60 days overdue on their auto loans in September, the highest rate on record over at least 30 years. This is mainly due to inflated vehicle prices and rising interest rates, making loans much less affordable. Already facing depleted savings and high borrowing rates in other areas of their finances, many Americans could face more delinquencies.

• Mortgage rates continue to rise. The Mortgage Bankers Association reported the average 30-year fixed-rate mortgage increased last week to 7.9%, the highest level in 23 years. Mortgage applications hit their lowest number since 1995, indicating buyers are avoiding purchases, unable to afford the current rates, and inflated home prices. Existing homeowners are also less likely to refinance, adding to an already volatile market.  [🤓]

• It’s never been a worse time to buy a home. Home affordability is at record lows compared to renting. A report from CBRE revealed the average monthly new mortgage payment is 52% higher than the average apartment rent, the most significant gap on record. With mortgage rates nearing 8% and a limited supply of available houses on the market keeping prices high, buyers have been deterred from making purchases. In theory, renting and buying should be evenly matched, but the previous biggest spread was 33% in 2006.

• Buyers are flocking to newly built homes as the housing shortage continues. The Commerce Department reported that new home sales jumped by over 12% in September, the most monthly sales since early 2022. Even though mortgage rates are nearing 8%, many builders are offering incentives to lure in potential buyers, making new homes slightly more affordable. New homes are going fast because homeowners are hanging on to their existing homes with cheaper mortgages. Sales of existing homes, which comprise most of the housing market, saw the fewest sales since 2010 last month.

   

It’s a good time to be a massive tech company. We’re about a third of the way through third-quarter corporate financial updates; broadly, the updates haven’t been that inspiring.

Big Tech, though, demonstrated the power of their recent strategy shift from “growth at all costs” to financial efficiency. They’ve been able to lay off tens of thousands of workers over the past year without losing any momentum. Sales have accelerated, and profits jumped.

Click to dig in & vote your reaction, see how others feel

• Microsoft does everything right

• Alphabet’s cloud isn’t catching up

• Spotify finds the formula for profit

• Meta’s ad engine roars again despite VR losses

• Amazon profit surges after massive cost cuts

View company rankings based on your votes▶️

🏡 For your home

7.9% = Average 30-year mortgage rate

That’s up from 7.4% a month ago and up from 7.2% a year ago. _{Mortgage Bankers Association, 10/20/23}

$394,300 = Median existing home sales price

That’s down from $404K the month before and up from $384K a year ago. _{National Association of Realtors, 9/30/23}

💼 For your work

210,000 = Layoffs Last Week (Initial jobless claims)

That’s up from 198,000 the week before and in line with pre-covid averages. _{Labor Dept., 10/20/23}

336,000 = New jobs added in September

That’s up from 227,000 in August and above pre-covid averages. _{Labor Dept., 9/30/23}

3.8% = Unemployment rate in September

That’s the same as August and still near the lowest rate in 50+ years. _{Labor Dept., 9/30/23}

9.6M = Available jobs in August

That’s up from 8.9M in July and well above pre-covid averages of ~7M. _{Labor Dept., 8/31/23}

Who’s hiring: Professional and Business Services, Leisure and Hospitality

Who’s firing: Arts, Entertainment, and Recreation

👜 For your wallet

3.7% = Cost of living increase (1-Year Inflation)

Living costs are 0.4% higher than the month before. Normal inflation sees prices rise by 0% to 0.2% per month, 1-2% per year. _{Bureau of Labor Statistics, 9/30/23}

2.4% = Groceries cost increase (1-Year inflation)

Groceries are 0.1% more expensive than they were a month ago. _{Bureau of Labor Statistics, 9/30/23}

$3.53 = National Average Gas Price/Gallon

That’s down from $3.84 a month ago and down from $3.76 a year ago. _{AAA., 10/26/23}

💰For your savings

0.46% = Average interest banks pay on a savings account_{, FDIC, 10/16/23}

5.50% = Interest rate banks earn on their savings accounts_{, Federal Reserve, 7/26/23}

The Federal Reserve has raised baseline interest rates from 0% to 5.50% in the past year. Make sure your bank is paying you higher interest on your savings.

💸For your investments

-3% = This past week’s change in the US Stock Market

-4% past month, +8% past year, and +55% over 5 years. _{S&P 500 Index, 10/26/23}

4.85% = The yield on the 10-Year US Treasury Bond

Yields are -2% this past week, +7% this past month, and +21% over the past year. _{US Government Bonds, 10/26/23}

+20% = This past week’s price change for Bitcoin

+31% in the past month and +65% in the past year. _{Coinbase, 10/26/23}

+16% = This past week’s price change for Ethereum

+14% in the past month and +16% in the past year. _{Coinbase, 10/26/23}

Gross Domestic Product (GDP) is how we track how much stuff the economy is producing. The actual number (~$27 trillion) doesn't matter as much as the direction and magnitude. We track the growth rate of real GDP (inflation-adjusted) to know whether the economy is expanding or contracting from the previous quarter.

The reporting style can be a bit confusing. The main number you hear will be an annualized growth rate (+4.9%), representing how much the GDP would increase/decrease if the economy hypothetically grew at that rate for an entire year. It's different from how much our production increased/decreased quarter-to-quarter (+1.2%) and not representative of the growth/decline over the past year (+2.9%). Annualizing the past quarter’s change makes the backward-looking number a little more forward-looking.

A mortgage is a loan you take out to buy a home. The collateral, the thing you lose if you don’t pay back the money, is the home itself. The collateral reduces the risk for the lender. Credit cards have much higher rates because there’s no collateral.

Mortgage rates can be fixed or floating. A fixed rate means you've locked in that percentage of the loan you need to pay back in interest each month, and it won't increase. A floating rate is usually tied to the movement of a benchmark interest rate. So, as broader interest rates rise, your rate increases, and you pay more each month.

Whether fixed or floating, banks determine their mortgage rates by taking a baseline low-risk lending rate like US Treasury bonds, then marking it up based on how risky you are as a borrower. So banks say, OK, we can lend to the US Government (considered no default risk) for ten years at 4% interest. You're more likely to default than the US Government, so you must pay us higher interest to make it worth the risk, maybe 7%. As baseline rates rise, your rates will rise.