THEME: UFOs (Unidentified Fearful Objects) are Real👾🛸

My CIO (Check It Out) Report on the weeks just past — events, sarcasm, and global macro reflections

THEME: UFOs (Unidentified Fearful Objects) are Real👾

🛸UFOs (unidentified fearful objects) are real👾! As we approach the month of #Halloween (aka, Spooky Month), we have been hit recently by these UFOs—Ubiquitous falling optimism, unbelievable financial outlooks, ultimately fallible optimists, or unidentified fearful objects? Any way you look at it, market #UFOs are real, need to be understood, and appropriate #investment plans should be made.

📊No single reason: Stock markets are choppy and down, credit spreads (an indicator of corporate debt risk) are wider, and volatility is up, but for no singular identified reason. People point to a slew of apprehensions but few of them are completely new.

🛸UFOs: These unidentified fearful objects (UFOs) have lately revolved around stock markets, economic expectations, U.S. elections and new candidates, German elections leaning right, wars, starvation in Sudan, hidden investment leverage, higher Japanese rates wrecking the Yen carry trade (where you borrow in a cheap currency and invest almost anywhere else), U.S. interest rates not falling fast enough, Russian, Iranian, and Chinese social media election interference, and the breakup of Devin Strader and Jenn Tran. 

🌌Other UFOs—Ultimately fallible optimists or Unbelievable financial outlooks: Several big name tech companies like NVIDIA and Broadcom have seen share prices fall drastically in the last couple weeks not because the companies performed poorly, but because they missed the loftiest of analyst estimates. In other words, the analysts were wrong, but the companies' shares got punished —> Imagine you win a marathon and beat your best time but are denied the gold because a couple judges thought you should have done the marathon quicker! Welcome to the market, the ultimate beauty pageant!

🛰UPO: The yet unidentified presidential outcome (UPO) will entertain, rivet, enthuse, and dismay up to and through the election —>Tuesday's presidential debate will be must-see-TV📺

☄Ubiquitous falling optimism (the other UFO): #Taxes, one way or another, are probably going up to fund everything regardless of who wins the election. Structures like private placement life insurance (#PPLI) and private placement variable annuities (#PPVA) can help protect investments from taxes —> If you are an RIA, wealth manager, or high-net worth family, ☎reach out to talk to us about #PPLI and #PPVA.

💸Unidentified income fears: Union deals are increasing wages, but weak August payroll/employment numbers and negative revisions for July and August are spooking confidence in consumer spending as we enter the holiday seasons👻🎃🌲

Big Loss: People are receiving mixed messages on consumer durability as discount retailers have closed hundreds of stores, Big Lots declares bankruptcy (it's been sold to a private equity firm), and consumer payment delinquencies edge higher; on the other hand overall retail sales continue to make new records, Temu , SHEIN and Amazon grow market share, and stalwart names like Walmart are at record highs! In other words, over two decades into this trend, we still see retail hit by the shift to online and especially mobile! Note: Over 3,000 U.S. companies have filed for bankruptcy in the first half of 2024, up a third from last year.

What is normal? We may be returning to normal, but the definition of normal yield curve and normal yields probably won’t look like the last 15 years that were distorted by the great financial crisis of 2008, ZIRP, QE, and pandemic —> Of course, the next unidentified fear or incident is always around the corner😬

Aliens: At this point, if an alien from another galaxy were to suddenly appear, it could be a welcome relief👽

Game of Homes🏡 ⚔️🛡️: We don’t see home prices collapsing in the U.S. for several reasons which we term “Game of Homes,” including:

1. Lack of supply
2. Slow build out of new homes
3. Strong residual post-pandemic demand
4. Demographic population and immigration growth increasing demand
5. Price inflation
6. Demand from Millennials forming households (with more Millennials than Boomers)
7. Remodeling projects and additions that continue to add value
8. People escaping their high-tax state but not selling their old home (thus reducing supply rather than keeping the status quo)
9. Individuals as well as large funds purchasing supply as a long-term investment to lease out
10. Buyers psychologically accepting a new normal of higher prices and higher mortgage rates

As long as the economy does not enter a severe recession, housing could be a heads you win, tails you don’t lose situation. If you buy now and interest rates increase from here, monthly mortgage payments will probably increase even if home prices come down a little, but you’ll be locked into a lower than market rate; and if interest rates decrease (as expected) home prices may jump higher, and you could refinance your home to a lower mortgage rate.

—>Home affordability may rise as a central campaign issue. Note: 2005 was the peak home building year over the last two decades—kinda crazy, huh 🤔 Can you think of something else that has that kind of demand, yet less is being produced?

StayFlation: Inflation has trended down which is great, and we hope it continues to do so, but (barring a recession) that is not our expectation. Lower interest rates should increase production capacity eventually, but before that happens lower mortgage rates may lead to an uptick in demand for homes, furnishings, appliances, and commensurate property casualty insurance expenses. Higher import tariffs (especially on goods from China) may also help inflation to linger.

Ungrateful: Expect the Fed to lower interest rates only 1/4% in September and expect investors to be disappointed that it isn’t a more substantial 1/2%. The Fed will remain data dependent, and investors will remain dependent on stimulus.

Savings: Certificate of deposit (CD) rates, money market rates, T-Bill rates, and saving account rates will decline with the front end of the yield curve as the FOMC lowers rates. People who have gotten used to seeing their cash earn income will have to lower their expectations. —> We may see an increased push into private credit investments as families and endowments seek to maintain or increase portfolio yield.

RIP: James Earl Jones, the voice of Disney characters Darth Vader and Mustafa, and a great stage and screen actor. 

We remain long-term optimistic: Recall our December 2020 report, "New Year, New Decade—The Roaring 20s" where we even mentioned the "sensible use of artificial intelligence"—we retain that Roaring 2020s call based on productivity, technology, relatively normalizing interest rates, and a Fed that seems to be willing to break glass in case of emergency.

Make it a great month,

Michael

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Michael Ashley Schulman, CFA

Partner & Chief Investment Officer

Running Point Capital Advisors

“We deliver custom investment solutions, family office services, innovations, and unique perspectives to you and your family—we are your family office—you can emphasize your enjoyments, priorities, and legacy.”

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~~Disclosure: The opinions expressed are those of Running Point Capital Advisors, LLC (Running Point) and are subject to change without notice. This is not investment advice and this is not a recommendation to buy or sell a security. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Past performance is not indicative of future results. Forward-looking statements cannot be guaranteed. Running Point is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Running Point’s investment advisory services and fees can be found in its Form ADV Part 2, which is available upon request. RP-24-142