Five for Friday - October 25, 2024
Rising Rates, Market Crashes, Long Rallies, Mortgages, and AI
1. Rates
The great irony in today’s markets is that since the Fed cut interest rates on Sept. 18, the 10-year Treasury yield has actually risen from 3.70% to 4.20% – highest since July – and taken things like mortgage rates higher with it. So, what’s happening? Well, while short-term yields do closely track the Fed, longer-term yields have other drivers. For instance, they tend to rise if the outlook for economic growth and/or inflation is rising, because it means the Fed will likely keep rates higher over a longer cycle. Of late, both a stronger-than-feared economy (see: the big Sept. jobs report) and worries about sticky inflation (plus the U.S. fiscal situation) have led investors to price in a slower and shallower rate cut path than previously expected. Although this in part reflects economic strength, it has also hindered would-be homebuyers and others anticipating lower borrowing costs. It’s also a potential headwind for stocks. To get lower long-term rates, you almost need a weaker economy first—a tricky tradeoff, and not one the Fed is likely to desire.
2. Election
We’ve spent most of 2024 talking about how the market has historically performed well in presidential election years, with strong gains under both Republican and Democratic administrations. But the flip side is also true: nearly every president has been in office for a market crash. Not that many (if any) of the selloffs, from the Covid crash to the dot-com bubble, were the responsibility of the sitting president. That office gets far more credit and blame for the markets and the economy than a system with checks and balances – like the US – allows for. As my pal Michael Antonelli likes to say, “History happens to the president.” We’ve seen 25 market corrections (of -10% or more) in the last 50 years. Expect one or two more before 2028 – regardless of who wins the election.
3. Rally
The second anniversary of the current bull market has been a chance to discuss the typical trajectory of bull markets over the last century and the fact that the S&P 500’s +70% return over the last 24 months falls short of the average bull market’s length of 62 months and magnitude of +183%. But what if we look at the last 20 years instead? Despite the fresh all-time highs we’ve seen lately, the last 20 years have been worse than mediocre for the stock market. The 665% total return of large-cap U.S. stocks for the 20 years ending Sept. 30, 2024, is below the average 20-year return over the last century (812%), and well below the highs seen at the end of major bull markets (reaching +2,000% or greater in both the mid-1960s and early-2000s). Put another way, if both the secular and cyclical bull markets are short of historical averages, would it be surprising if this bull market had room to run?
4. Mortgages
This podcast from Bloomberg about the recent rise in mortgage rates is worth a listen. One nugget that I found fascinating was the idea that because refinancing a mortgage requires so much back office processing and physical paperwork, companies might actually choose to be less competitive on rates (i.e., set them higher) simply to preserve the needed manpower to process all the applications. That is to say, human capital is the bottleneck (and this was clearly the case during the 2020 refinancing boom). This is, to me, one of the many “boring” tasks where AI could improve productivity, enhance the consumer experience, and increase company profitability – all at the same time.
5. Speaking of AI
Did you know that the small island nation of Anguilla has been one of the most unlikely winners of the artificial intelligence boom? That’s because the Caribbean country owns control of internet addresses ending in “.ai” and gets a registration fee anytime a new domain is registered (e.g., Google.ai). Fees quadrupled to $32 million last year and now account for about 20% of Anguilla’s total government revenue – with plenty of room to grow. Bad luck, Antigua!
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