We are reducing IT, Real Estate and Consumer Discretionary weights and shifting
US REAL ESTATE PRICES SHOULD EVENTUALLY DECLINE (BUT NOT IN NEAR FUTURE) • Mortgage rates are approaching 8% • Housing inventories are low due to sellers being reluctant to give up historically low mortgages • Housing affordability is at an all time low • Eventually, baby boomers (or surviving offspring) will sell their homes and create a market decline • Case-Shiller Index shows housing levels nearly double the pre-2008 market crash • Once housing starts to decline, then inflation will drop and approach negative levels (housing is 30-40% CPI) • Second home purchases have increased since the pandemic — this added risk can accelerate during a down period CHINA REAL ESTATE CASTS A SHADOW ON GLOBAL GROWTH • China economic slowdown, caused by overexpansion (Evergrande) has been keeping global growth muted • China stocks have suffered, though contagion has not (yet) spread • China real estate slowdown has kept a lid on building materials (in some areas approaching 50% of purchases) • Major commodities have actually dropped YTD (assisting with US inflation) • Deflation in China could potentially spread to global markets (especially with a global economic slowdown)
• 30M retiring baby boomers, create a once-in-a-generation, impact on employment rates • 6.4M unemployed but 4.3M eligible for retirement (eligible retirees may exceed 10-15M on sidelines) • Unemployment rates will not rise appreciably despite sluggish economy — many foreign nationals are the ones being fired
AUGUST LOSSES ACCELERATE IN SEPTEMEBER W/RISING INTEREST RATES o Equities experienced a difficult August — this is now being extended in September (traditionally weakest month of the year) o The fall has coincided with a rise in the long bond yields (rising by 60bp since June 1) and weaker expectations o September is usually most challenging month of the year (falls by 0.7% on average) o Speculative, loss producing, high debt equities are the most vulnerable along with speculative, money-losing equities o September is shaping up as another difficult month (w/few positive catalysts expected in near future) o CPI results are now mixed — eye on labor costs and real estate sales levels and price changes (Mortgage rates 7.23%--22 year high) o Next key indicator will be October 12 (next CPI) — energy is still rising in September … o Next Major Catalyst will be Oct 31/Nov 1 Fed meeting — Fed likely to indicate an end to rate hikes (key signal to # expected rate cuts ’24)
Made with FlippingBook - PDF hosting