I wish I had a bunch of positive things to talk about right now, but with geopolitical tension, a bear bond market, and interest rates at a 16-year high, there is not much positive other than Florida State currently being undefeated. Let’s talk about the reality in today’s market.
There is a lot of tension in the Middle East, and geopolitical forces are hard to forecast in the markets. I would expect the stock market to be somewhat volatile as news headlines continue to emerge over the next month. My concern is how many of the surrounding countries get involved in the current crisis. How long the conflict will last and how many countries get involved for one side or the other is something to keep an eye on. I am not sure that any of the surrounding countries have the desire or manpower to participate in a long-term conflict. All the surrounding countries are trying to grow their economies and sell oil, and war does not foster either of those goals. The stock market has a lot of positive influences right now, and a tug-of-war is going on between what is known as a wall of worry and all the positive stuff on the economy. I follow Charles Payne from Fox Business. He is levelheaded and experienced and tells it like it is, and he has said, don’t panic, folks; this is not the time to sell. It is tough to time the market, and most times, when you’re out, you miss the movement higher as it often happens quickly; right now, you need to hang on and hang in there.
Inflation continues to cool; September was essentially a flat line number, and unemployment is still too low. This will likely be a slow and stubborn fight for the Fed to reach its target inflation number. Most smart guys think the first-rate cut will be in June next year.
Mortgage rates are influenced by various items, not just the Fed funds rate that may be cut in June. The 10-year treasury is one of the most significant influences. There has been a spike in 10-year yields over the last 90 days. The 10-year treasury has gone from 3.75% to 4.98%, and mortgage rates have also increased. The US continues to issue debt to fund itself. We need buyers for this debt, which is the problem; there are not a lot of buyers.
The Federal Reserve has changed its policy and is not buying its debt. China is not purchasing as much debt these days, as they have economic problems to deal with, and Japan has also reduced its purchases as they are buying more of its debt. The increase in debt supply being issued and a lack of demand for that debt is causing rates to go higher. Here is the bad news: as the cost of our debt increases, so does our interest payment. I heard that 20% of the government’s total revenue next year will be spent on interest payments on our debt.
Long-term rates need to come down, not just for the consumer and the housing market, but for the overall health of our country’s finances. A government shutdown would usually be OK for me. However, if it happens now, I am concerned with how that may move interest rates in the wrong direction. There are 3 rating agencies for the US debt. We have always been AAA-rated and the best and safest place to put your money. In 2011, one agency lowered its rating to AA; in August of this year, another agency lowered its rating to AA, and the last one, Moody’s, may lower its rating if the government shuts down. That reduced rating could cause borrowing costs to increase. I hope these folks we elected to Washington figure out a budget to operate the country by the middle of November to avoid a shutdown.
In 2022, the foreclosure rate was .23%. A 34% spike brings the rate to .308%. In 2010, the rate was 2.23%, almost 700% higher than today. A 34% spike may sound alarming, but it is so low that it is not a big deal, and we do not have a foreclosure problem.
I still believe the economy is doing well, and even though we will have a minor recession, we will have a soft landing. The stock market will be higher next year than where we are today. Mortgage rates will come down next year, and real estate and owning a home are among the greatest creators of wealth. The Bucs may win their division, and the Noles may play for a national championship. Hopefully, my Gators will play in a decent bowl game this year, and the Lightning will get back to winning again. There is a lot to look forward to as we enter the holiday season.
Stay safe, and say a prayer for everyone in the Middle East.
Feel free to call me anytime. As my wife’s favorite saying goes, “I appreciate the opportunity to be a part of your day.”