Daily Commentary

MarketMinder’s View: With the increase in “alternative consumer lending” powered by nonbank lenders (aka private credit), this article worries unseen risks may be brewing. The concern is understandable, but a passage here helps debunk the fear: “Thus far, though, even broader measures of consumers’ health aren’t showing major weakness. Researchers at the Bank of America Institute, which analyzes anonymized bank data, found that while spending in October was growing more slowly year-over-year for lower-income households than wealthier ones, their checking and savings deposit balances remain above inflation-adjusted 2019 levels. Many consumers could also start seeing additional tax savings next year.” Though nontraditional lending may be less visible, private credit shops are still incentivized to do their due diligence when extending loans—after all, they don’t profit if loans aren’t repaid. Now, some bigger banks fund private lending, and those exposures could conceivably channel risks into the broader financial system. (As the article lists some specific names, please keep in mind MarketMinder doesn’t make individual security recommendations.) But while this introduces some uncertainty, markets seem to be taking this into account, too. “Even with limited or mixed signs of consumer weakness or broad credit weakening, shares of many companies in the lending business have trailed large banks this year, as measured by the KBW Nasdaq Bank index. ... Large managers of private-credit vehicles that could fund consumer lending ... have also lagged behind.” Private credit may be more opaque, but markets—and other interested parties—are aware of the credit dynamics driving their bottom lines.

MarketMinder’s View: Houses are great to live in, but tougher to flip for a profit, as related here. Don’t get us wrong, we have nothing against investing in real estate. But for those considering it, give this a read. A snippet: “Yes, you can make a killing. But also, lots could go wrong: Repairs can take longer than you predicted. The house has bigger, hidden problems that you missed. You misjudged the market, or it simply turned sour while you were renovating. We’re in one of those tricky times now. Despite Fed interest-rate cuts, mortgage rates are still high. ... Meanwhile, housing inventory is low, and costs are rising for material, labor and home insurance.” All investments have their time in the sun as well as the rain. Residential real estate is no different. But given its idiosyncrasies—many of which this article delves into—investors should approach it with eyes wide open. This is doubly true with any illiquid asset-like property. Liquidity is key to manage for all investors. But that is arguably even more true for retirees. Ultimately, we find this—plus the so-called “sweat equity” it takes to be successful long term—isn’t for everyone.

MarketMinder’s View: As this article details, the current AI boom shares some superficial similarities to 2000’s dot-com mania, but there are several salient differences, too. (Since it mentions specific companies, please note they are incidental to the broader theme under discussion; MarketMinder doesn’t make individual security recommendations.) “The main one is that A.I. is being financed and controlled by multitrillion-dollar companies ... that are in no danger of going kaput, unlike the dot-com start-ups that were little more than an idea and a bunch of engineers.” That is one positive fundamental underpinning AI spending. Another is that, by and large, sentiment toward AI appears more optimistic than full-fledged euphoria right now (though, based on some of the commentators interviewed here, some exuberance may be building). Now, not all AI investments will work out, but markets don’t appear over their skis yet. For more, please see last month’s commentary, “What to Make of AI Bubble Talk.”