Another four years is doable ...

… said the pleasant millennial advisor I met this week in Honolulu, adding that we seem to have managed through the first Trump presidency. Mahalo!!! This was the chill attitude that greeted me all week in this paradise state where I honeymooned 40 years ago. Another advisor noted that these “interesting times” remind him of The Simpsons and “people watch more cats on YouTube.” We laughed often and some even danced—“Everybody’s doing the YMCA!” This, as my airport driver upon arrival warned that Hawaii is the most expensive state in the US. Bananas, which sold for $1/lb pre-Covid now cost $3, and chicken went from 99 cents to $4/lb. Meanwhile, the median single-family home price in Oahu is $700,000, which is around 920% higher than the median salary of $76,000. Don’t get any of us started on housing! The ratio of homes to households hasn’t been this low in 60 years. Accessory dwelling unit here we come! We’re short several million units and yet the market is frozen. Mortgage rates are closing in on the painful 7% level seen earlier in the year, a consequence of rising Treasury yields and fears of reignited inflation. Wage growth has slowed, and home prices have held up, making a purchase difficult or unfeasible for many. Worse still, housing starts aren’t keeping up with completions, meaning the number of units being built should decline for the next few quarters. There is even some indication that people are actually packing up to move elsewhere in town in search of cheaper rent. Come enjoy winter, as new rents paid in the Northeast fell by 6% in the third quarter of 2024. There were some glimmers of relief in the latest data (more below), with home sales ticking up slightly above consensus and, importantly, single-family rents showing disinflation in recent months. Also, architecture billings (which are roughly six months ahead of construction spending) rose to the highest level since the beginning of 2023. Still, prices of existing homes rose, while the supply for sale declined a bit to 3.8 months (versus an average of 3.9 months in 2019). Mortgage rates need to come down for the situation to really improve. 5.5% for a 30-year mortgage is what we’re rooting for.

As for the equity market, it isn’t locked-up or frozen. Earnings rose 8.6% y/y in the third quarter and 11% aside from Energy. On average the S&P 500 goes up by 5% from the election to year-end. This post-election period has seen ups and downs so far; though the 2016 election came after a flat market, whereas stocks rose sharply all this year. Indeed, 2024 stands a chance of being the best election-year market in 40 years. US households saw their net worth reach a new high of $163.8 trillion in the second quarter. If we were to suffer a drawdown, it would not likely be more than a healthy 10% (or 5,400 on the S&P) since there’s neither growth scare nor recession in sight. Sentiment is a concern, but it is not yet at an extreme; margin debt, for instance, has been flat. Another concern is the tilt towards growth and the narrow advance to market highs. Price-to-earnings multiples of value stocks are very low by comparison, while expected earnings growth rates are finally starting to move in their direction. It’s hardly been a straight line up for the ignored small cap universe, but they’ve been outperforming since July. Still, if the market continues to rise without breadth improving, it might be a red flag.

There are signs of a resurgence in growth. And not just in the US. China is stimulating its economy, and European central bankers are on an easing path. Importantly, consumers elsewhere in developed markets (not just the US) are finally seeing an increase in real purchasing power. Real consumption in Japan jumped 3.6% y/y in the third quarter.  Europe’s figure looks to be about 2% and, together with the US, developed market consumption is set to rise at a roughly 3% rate in Q3. That may moderate a bit this quarter but even if DM consumption comes down to 2% y/y, this, together with a recovering China, suggests that growth is taking hold. In the US, productivity gains appear to be raising potential growth above 2%. What comes next may have a lot to do with Trump’s priorities. A crushing set of tariffs has kneecapped growth before (Smoot-Hawley). But if the tariff threat is used more sparingly, the global economy may continue to recover. The US looks pretty resilient right now, though inflation is proving hard to squash. Strategas’ “Common Man” CPI, which focuses on non-discretionary expenses, has come in hotter than headline CPI for 40 of the past 45 months. Might the Fed skip a cut in December? Also, goods prices, which had been helpfully disinflationary even as the price of services rose, have started to move upwards again. Global core CPI ex-China and Turkey has risen 3.1% y/y. For now, market participants’ US 10-year inflation expectations remain anchored at around 2.3%. Doable! I love visiting Hawaii, and I’m sad to leave. The island atmosphere is special, the seafood unbelievable, plus the pastries (!), and the people are so chill. This is a very blue state, but without exception the people I met are taking the election result like toes in the sand as warm water washes over them. “Everybody’s doing the YMCA!” Now, if you just can’t do that, or if you’re in a house divided, may I suggest doing the Elaine Benes instead …

Positives

• Housing making some progress Existing home sales rose in October to an annual rate of just below four million units. Housing starts fell 3.1% m/m in October, but this is likely weather-related. The National Association of Home Builders’ Housing Market Index rose this month versus expectations of a decline. Future sales jumped to their highest level since April 2022.
• Good not great PMIs The S&P Global PMIs rose in November, beating expectations on the whole. The manufacturing PMI showed a decrease in output but new orders and employment rose. For the services PMI, new business gained but employment fell further into contraction.
• Is the job market stabilizing or worsening? A couple of indicators send mixed signals regarding employment. Lightcast says job postings are off nearly 20% at present versus a January 2020 baseline, especially in professional and business services. On the other hand, the new Census survey shows optimism regarding hiring jumping after the election. Meantime, layoffs declined but the number of people on unemployment rose to a three-year high.

Negatives

• Consumer sentiment rises slowly The University of Michigan’s Consumer Sentiment Index rose in November to 71.8 against an expected 73.5. Befitting the period after a momentous election, the views of Republicans surveyed jumped while Democrats sagged. Still, this makes four up months in a row. One-year consumer inflation expectations remained at 2.6%, but 5-10 year expectations ticked up 0.1% to 3.2%.
• Regional Feds expectant The Philadelphia Fed’s manufacturing index fell to -5.5 in November. The Kansas City Fed’s manufacturing index also dipped slightly, while the New York Fed’s rose. Interestingly, expectations for the coming six months increased in all three surveys. Probably this is a reaction to the election, with lower taxes and regulation on the way.
• Leading the way lower The Conference Board’s Leading Economic Index continues to indicate weakness. The index dropped to 99.5 in October, with just three of its 10 components positive. The primary culprits: ISM new orders and manufacturing hours.

What Else

An amazing year The total market cap of US stocks as a percentage of GDP increased approximately 150-200% in just the last year. Such a feat exceeds the runup seen in the bull market of 1982-87 as a whole and also that of 2002-07.  

The rise of India India only just passed China in population size, but its average age is much younger. By 2050, India’s working-age population is due to rise by 145 million people, while China’s is set to fall by 226 million, giving India a working-age cohort 50% larger than China’s.

Under the wire There’s been a big increase in West Coast inbound container traffic—up more than a third against last year at the port of Long Beach. Probably this is just an attempt to make the best of it regarding tariffs. On East Coast and Gulf ports like Charleston and Houston inbound containers are down from last year.