All That Matters: Summer’s Over. What Matters Now?

What are “rates” and what are they doing?

Ross:
Of all the stuff that’s swirling around, I think what has mattered lately is spiking interest rates. On the short end of the curve, we’re used to that spike. But were also seeing the long end of the curve – the 10-year Treasury rates – have pushed to cycle highs, even with inflation down to 3% from 9%. I’ll let you explain rates in more detail, but they generally impact the economy, the consumer, and they impact stock prices. It’s a catchall.

Mike:
Let’s just broadly define rates as the interest rates in the United States of America. Basically, the Treasury market. And those interest rates are determined by market participants, economic forces, currency differences, and all these other things that go into increasing or decreasing the rates. Why have they been rising lately? Frankly, it’s because expectations about our economy are starting to ramp up. There’s a tracker called Atlanta Fed GDP, and it thinks that next quarter’s GDP is going to be 5%! To put that into context, we were around 2% this previous quarter. So, when growth picks up, the market worries about inflation, and then these rates we’re mentioning start to rise and hurt the stock market. And Ross, the stock market has pulled back. Do you think that’s the rates, or is it seasonality, or something else?

Ross:
There is some seasonality: August and September are historically tough months for the stock market. So while today we’re not out of the seasonal rough patch, I also think rates are a driving force. If a short-term Treasury is yielding 5.0-5.5%, the price you’re willing to pay for a share of stock or earnings should probably go down.

Mike:
It should. If you remember that your money is fungible, you remember that your money can go anywhere. These high yields are making people think they can make more money in a Treasury bond or Treasury bill than a stock. And as these rates go up, it just makes it more attractive, and it makes your standard wealth management 60-40 portfolio better, because that 40% – the bond part – is a little bit better.

How is the U.S. economy doing?

Mike:
In addition to rates being worrisome, I’m also looking at growth. The growth in the economy is accelerated – it certainly accelerated in the spring and summer – and it’s probably peaking a little bit. As this growth starts to roll over – what we call the rate of change – makes the market is a little more tepid. And the seasonality we mentioned plays into it, as well as the change in sentiment on a recession. At the start of the year, everybody thought there was going to be recession and it was going to be a super bad outcome this year. A lot of those people have moved over to the “soft landing” camp where we will avoid a recession despite the Fed increasing rates.

Ross:
Sentiment was super bearish at the end of last year, and even up to the beginning of the summer given the regional banking crisis and debt ceiling debates. But once we hit summer, people got really bullish and you lost that negative sentiment as an asset. Maybe I’m being “perma-bullish” but while economic growth is slowing, so far it’s slowing without it being a detriment. That’s good; we need that growth to slow, otherwise the Fed is going to keep hiking rates (as they frequently remind us in their statements to the press). If they think economic growth is too hot, they will see it as inflationary and they’ll continue to keep rates higher for longer. You want to land in this sweet spot – this soft landing – where it’s not overly aggressive growth, but we’re not in a recession. And quite frankly, we’re on the path to that. That’s the kind of news where it seems bad, but it’s also good news because it takes the Fed’s foot off the gas, at a minimum.

Mike:
All the things we’re talking about are definitely related to the economy as a whole. Rates are related to the economy, the Fed, inflation, all this stuff. So you might ask yourself, how is the economy actually doing? You might think it’s doing poorly based on what you see in the news. I’ve seen a story where 6 in 10 Americans think the unemployment rate is a problem right now – meanwhile it’s at a five-decade low. The news might suggest that things are not fine, when in reality and in aggregate, the economy is doing fine. In the aggregate, home prices are still quite stable, the economy is quite stable if not growing, and the job market is very stable. And what you said is correct: we don’t want the economy to grow too fast. We want it to grow at a certain pace, and that’s what we’re dealing with now. It may not be very interesting – it’s not a major global event – but that is what’s happening.

Ross:
And just to reiterate: we’re always looking at the aggregate. We know there are people doing better, and there are people doing worse, so we kind of have to look at the 30,000-foot view. The other piece of data I want to point out quickly is the consumer confidence survey. Confidence kind of plummeted in a really recent reading, but within that report they asked people about their future spending plans. More than ever, people are planning to go on vacation, to buy things like cars, et cetera. I’ve seen people talk about this: “everything is bad, but I’m doing fine.” I think there’s a lot of that still going on, even with the unemployment rate being at 3.5% and things continuing to truck along despite some headwinds and tailwinds.

Pop Culture Corner

Mike:
To wrap this up, things are mostly fine right now. There are obviously things to worry about, but there’s things that are better. The economy continues to chug along. Now that summer’s winding down, let’s end this on a light and airy note. Ross, what are you reading and watching right now?

Ross:
Because of my two-year-old, the song of the summer for us is Mickey’s Clubhouse. It’s like a 65-second song and I’ve heard it about 100,000 times. As far as movies, I just watched The Fugitive with Harrison Ford for the first time. There’s not as much new stuff coming out with the strikes, so we’re kind of digging into the archives.

Mike:
There’s this podcast called the Rewatchables where this team looks at old movies and they kind of talk about it for an hour. They just did National Lampoon’s Vacation, and it’s an all-time classic. And I’ve also been going back and watching old classics. I watched Casablanca, which holds up as an incredible movie. And then I watched The Godfather Part II, which is generally considered one of the greatest movies of all time. And while Goodfellas is one of my favorite mob movies, The Godfather II is a better film, but Goodfellas is a better movie. Does that make sense?

Ross:
Sure – Goodfellas has more of a ride with highs and lows with a lot of needle drops and great classic songs. But probably not going in the Library of Congress anytime soon, unlike The Godfather II. Meanwhile at our house we’re pushing Pixar hard, trying to get at least the quality stuff to the top with our two-year-old, but it doesn’t always stick.

Mike:
Thanks so much for the time, Ross. There’s certainly plenty to think about and chew on. And while there are some things that matter, it’s maybe not as crazy as it’s been in a while. Stay tuned for our next episode where we’ll continue to talk about what matters most to you.