Market Note – October 24, 2023

By Hightower Great Lakes on October 24, 2023

Consumer Signals: Higher Wages, Higher Spending, Normal Savings

Earnings and job growth remain elevated, leading indicators for the consumer. The consumer represents 70% of U.S. GDP. In September, retail sales were better than expected (+3.8% y/y) and leading housing indicators (housing starts and building permits) continue to remain elevated, above ten-year averages.

These are just two data points that underscore that consumer spending remains resilient and secular housing shortages are persistent as existing homeowners keep their low mortgage rates. 92% of U.S. homeowners have mortgage rates below 6% and 72% are below 4% fixed rates.[1]

Chart 1: Real Earnings Growth; Annualized Earnings Outpace Inflation[2]

Chart 2: Housing Starts and Building Permits Stay Elevated[3]

Ominous headlines like, “Americans are Overdue With Their Car Payments at Highest Rate in Nearly 30 Years,” can drive some uneasiness for market participants trying to predict the direction of the U.S. economy.

The aforementioned overdue car payments refer to the 6.1% of subprime auto borrowers who are at least 60 days past due on their loans.[4] Despite the negative headline, it’s important to recognize this is impacting subprime borrowers and the “highest rate in nearly 30 years” is only slightly above 2019 levels (5.9%).

It’s no question why subprime borrowers with high floating interest rates for cars purchased at inflationary prices are feeling pinched. And while some believe this to be a leading indicator, a breadth of other consumer indicators remain stronger than pre-pandemic trends.

The big banks reported a resilient credit environment – indicating that any credit pressure has remained controlled. American Express (AXP) reported 7% y/y spending growth across its cardholders. JP Morgan (JPM) reported that its credit card delinquency rate is at 0.95%, below its pre-pandemic 1.17% delinquency rate.

As spending remains strong, savings rates have declined to historical norms, coming off of easy monetary policy and excess pandemic-era savings.

Chart 3: Income, Spending and Savings Are Back Within Historically Normal Ranges[5]

Managing Geopolitical Activity With a Sound Portfolio Strategy

It is important to invest in a strategy that supports your risk tolerance and time horizon objectives. This is particularly true amid highly volatile geopolitical environments. A well-diversified, active portfolio can protect you from shifting global risks and keep you on track to reach your goals.

Yield Curve Bear Steepening

U.S. bonds continued to sell off on the long end of the curve, propelled by expectations the Federal Reserve will maintain elevated interest rates and that the government will further boost bond sales to cover widening deficits.

U.S. 10- and 30-year yields rose as much as 20 and 22 bps, following Fed Chair Jerome Powell suggesting that central bankers are inclined to hold rates steady at their November meeting but remain open to hiking again if a resilient economy fans inflation risks.

The U.S. 2-year note finished the week just 16 bps higher than the 10-year note, marking the smallest curve inversion in nearly a year. High yield spreads widened this week to +475 bps, nearly a 20 bps increase after trading in a 10-bps range for the last three weeks. Muni yields continued to follow Treasuries higher, rising 15-22 bps across the curve.

The Week Ahead

Earnings – Tuesday: BAC, JNJ, GS, JBHT; Wednesday: MS, UAL, LRCX, TSLA, NFLX; Thursday: AAL, UNP; Friday: SLB, AXP.

Economics – Thursday: GDP (Q3); Friday: Personal Consumption Expenditures (September), Michigan Sentiment (October).

Return for Selected Indices^[6]

Click here to read last week’s Market Note (10/17).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: Yahoo! Finance. As of June 14, 2023.

[2] Source: FactSet (chart). As of October 23, 2023.

[3] Source: FactSet (chart). As of October 23, 2023.

[4] Source: Forbes. As of October 21, 2023.

[5] Source: FactSet (chart). As of October 23, 2023.

[6] Source: Bloomberg. As of October 9, 2023.