Daily Commentary

MarketMinder’s View: As this article notes upfront, headlines often go into overdrive over arbitrary round number milestones—$1 trillion market caps, Dow 10,000, etc.—but there is nothing magical about them. So it goes with 5.0% 10-year Treasury yields, which some imply could pop the “AI bubble” or cause US stocks to struggle more generally. But why 5.0% and not, say, 4.9% or 5.1%? Moreover, we have seen this movie before—and not too long ago: “Why can’t this economy and market handle a breach of 5%? Yields last eclipsed that level in 2023, accompanied by even more frightening commentary. Pessimists believed at the time that the economy was being sustained by a fading cash cushion left over from pandemic transfers and years of involuntary saving, and that we’d face a reckoning once the cash ran out. Projections of a late 2023 or early 2024 cash cliff never panned out. Rather than a meltdown, the intervening years have seen corporate profits, household wealth and the S&P 500 Index all surge to new records; debt service ratios remain relatively low; and the broad economy produce above-average growth.” For many, the main financial significance of higher yields is they translate into 7%+ mortgage rates, making it harder to buy a home. But again, housing affordability issues aren’t new—and haven’t stopped the economy or stocks. To see why, the piece helpfully tabulates household consumption items that aren’t interest rate sensitive (think healthcare, food, fuel and utilities)—over 60% of consumer spending. Seen in this light, 5% yields aren’t the looming threat many make them out to be. “Higher market rates are, however, just as much a reflection of strong economic growth at the aggregate level—a perfectly normal feature of a humming, if uneven, economy. Ten-year yields averaged about 5.8% in nominal terms from about 1990 through 2007, and today’s 2.6% inflation-adjusted, or real, yields look close to average. The difference is that we’ve emerged from the anomalously weak 2008-2021 period in which nominal growth was uniquely low and global central bank policy was extraordinarily accommodative.” For more on why the end isn’t nigh, please see last month’s commentary, “Why Treasurys Aren’t in Trouble.”

MarketMinder’s View: The Fed did what the consensus thought it would and raised the fed-funds target range a quarter point, to 3.75% – 4.00%. Now, the S&P 500 flipped from a small gain to a small decline after the release, but at -0.45% (per FactSet), you aren’t talking about much. Which makes sense: Stocks move chiefly on surprise, and futures markets and rates had long since pre-priced an overwhelming likelihood of a hike. More hikes in theory could be a bigger issue. So on that front, as this article shares: “The announcement was accompanied by new projections that show a healthy majority of top Fed officials—12 of 18—anticipate one more rate hike this year.” Everyone is entitled to their opinions and Fed members’ may count more than others regarding monetary policy. But don’t overrate them, either. First, their projections aren’t set in stone. How each Fed official interprets the data is a black box and may contradict their own prior statements on such matters. Remember when former Fed head Jerome Powell thought elevated inflation was “transitory” until it seemingly wasn’t? Friends, the Fed isn’t infallible. Second, as we wrote yesterday, though we think hikes are mistaken, that isn’t necessarily disastrous for markets. Even a couple more wouldn’t invert the yield curve. With long rates well above short—a proxy for banks’ new loan profit margins—overall credit growth continues fueling economic expansion. Rather than get wrapped around the Fed prognostication axle, evaluate decisions as they come. In this case, a quarter point hike doesn’t alter financial conditions much, and with everyone expecting one anyway, it isn’t shocking stocks.

MarketMinder’s View: With stocks comprising a record share of US households’ financial and total assets, this argues they now drive consumer spending through an alleged “wealth effect,” but that their volatility could make personal consumption expenditures more erratic. We doubt it. First, the numbers. Through Q2, equities make up a record high 34% of households’ total assets, while real estate dropped to a record low share of 32%. As noted, “Even though real estate wealth is still rising, the rate is nowhere near the pace seen in equity values.” That pace: “Federal Reserve figures last week showed that household net worth leaped $12.8 trillion in the April-June period, up 7% from the previous quarter, thanks to a $10.7 trillion jump in the value of equity holdings. ... In other words, Americans have never been richer, and it’s largely down to the soaraway stock market.” But does that make personal consumption vulnerable if stocks slump? Marginally perhaps, but considering the lion’s share of spending is nondiscretionary—e.g., rent, healthcare, insurance, utilities, fuel and food—and most spending is funded out of income, the idea that wealth effects drive consumption falls apart. When real estate figured more prominently in households’ asset mix, it wasn’t like folks were broadly selling houses or tapping home-equity lines to buy groceries, pay utilities and whatnot. We don’t see people selling shares (to any great degree) for similar reasons, either. For more on why consumption is made of sterner stuff than market whims, please see, last year’s commentary, “So Go the Top Earners, So Goes the Economy?”