Sudden Impact

The past month has been a period of “sudden impacts”, both politically and economically. Over the next several months, both should reach some resolution.

Politics and Markets

Everyone has their opinion of the political situation in the US, most of which are not especially positive. We always try to avoid politics, but the economic implications of politics can’t be ignored. The sudden impact of President Biden’s poor debate performance has sparked a bit of a mutiny among Democrats and angst among bond investors. Whether Biden withdraws or not, the Street perception is that the odds of a Trump victory have improved. New polls over the next week or two should give a clue to as to how much, or little, the debate changed the election calculus.

A second Trump term would presumably prevent his tax cuts from expiring, which, other things being equal, would worsen our fiscal situation. Our national debt has grown very large very quickly, and that creates nervousness in the bond market. That nervousness briefly triggered higher yields as bond investors fear more long-term inflation driven by deficit spending and the growing national debt. That reaction was short-lived as a stronger than expected June employment sent yields tumbling back at week’s end.

Back in 1982, the so-called bond vigilantes tacked on roughly 300 basis point (3%) premium on long term bonds to compensate them for inflation risk. What happened after the debate was a relatively tame 10-15 basis point addition to longer term yields, but that premium was added with lightening speed. We view this as a firm reminder that while the Fed remains in control now, the markets are not afraid to push hard against the Fed, when it is deemed necessary. We suspect this will be a challenge for whomever is elected in November as neither candidate ranks high on the fiscal austerity scale.

Economics and Markets

It seems like the resilience of the economy has been the story forever. No matter what happens, the economy always seems to hold together. That may be changing. The chart below is the Bloomberg US Economic Surprise Index, which we took from Bloomberg journalist David Ingles feed on X (formerly Twitter). This index shows how economists over or underestimate key economic data. If the stats under-perform expectations, that is a negative surprise and that is precisely what has been happening with increasing regularity over the last month. The index is now down to levels last seen back in early 2016.

 

On an absolute basis, this index is incredibly imprecise, however, in the context of today, it may well have more meaning. Over the past couple of years, the Fed has raised interest rates to more than 5% as it attempts to slow both the economy and inflation down. Inflation has come down from very high levels, but it remains at unacceptable levels. Lacking any pressure from a weakening economy, the Fed has been content to leave rates where they are. Now, quite suddenly, the economy is beginning to show some cracks. An economic landing of some sort seems more likely now, whether the Fed can avoid sudden impact remains to be seen.

We are not surprised by either of these forces: the market’s concern for the debt burden or the suggested cracks in the economy, only that it took so long for both to begin to be reflected in market yields. While the longer-term problem of debt levels will likely weigh on rates, an economic slowdown will likely pull long rates lower in the short-term (finally). This is why we have maintained our Treasury bond position in our portfolios. We are biased to lighten our Treasury exposure as the economy slows down.

 

What We’re Reading

Inside the crucial days leading up to Biden’s debate disaster

Chase Hints Increased Cost To Consumers For Everyday Banking Services

Powell Talks Up Progress, Putting Rate Cuts Back Into View

These Are America’s Wealthiest Suburbs

 

Palumbo Wealth Management (PWM) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PWM and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.palumbowm.com.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forwardlooking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

 The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forwardlooking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

 Past performance is no guarantee of future returns.

Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that the future performance of any specific investment or investment strategy will be profitable.

, , , , ,

General News

By: Adam