Source: Barron's Chinese
The current economic and market conditions in the United States are indeed improving, but the cost is a deterioration in the economy and markets in the long term.
Last week was the best week for the U.S. stock market this year, and the August 5th crash seems to have become a distant memory. Other signs of recovery are also emerging: The Bank of America research team led by Michael Hartnett noted that mortgage refinancing activity has increased significantly; the latest survey by the National Federation of Independent Business (NFIB) showed that optimism among small businesses has risen to the highest level since February 2022.
The decline in bond yields is considered to be the reason for the return of "animal spirits". The benchmark 10-year Treasury yield has fallen from a peak of nearly 5% at the end of last year to below 4%, and mortgage rates have fallen to a 16-month low. However, the research team of Bank of America also pointed out that the decline in borrowing costs has not yet translated into an increase in home purchases or a rebound in small business capital spending. So, since things can't get worse, maybe things are getting better.
U.S. consumer sentiment appears to be improving, according to a new University of Michigan survey released Friday. The biggest improvement came among Democratic and independent voters, who were encouraged by Kamala Harris's election as the Democratic presidential nominee, replacing Biden. (Sentiment among Republicans declined, however.)
A consumer survey conducted a week ago by AlphaWis for Morgan Stanley showed similar results to the University of Michigan survey, finding that sentiment improved the most among consumers who described themselves as "middle of the road," with the proportion of respondents who believed the U.S. economy would worsen falling to 36% from 47% a month ago, while the proportion of respondents who believed the U.S. economy would improve rose to 37% from 28%.
Democratic Americans can finally answer with certainty the question Ronald Reagan famously posed during his 1980 presidential campaign against Jimmy Carter: Are you better off than you were four years ago?
Jeremy Horpedahl, director of the Arkansas Center for Research in Economics, noted in an article that real CPI-adjusted wage growth under the Biden administration was 0.3% through July. Before Democrats start celebrating, they should note that real wage growth was 6.6% under Trump, according to Horpedahl's research.
On the investment side, Alicia Levine, head of equity investment at BNY Wealth, has been bullish since the market turmoil in early August and is optimistic about the market's performance in September. She pointed out that September is "never a calm month" for the market. However, as the Federal Reserve is likely to cut interest rates by 25 basis points and the U.S. economy seems to be achieving what many people call a "soft landing," she expects the S&P 500 to reach 5,700 by the end of the year, up 2.6% from last week's closing price and slightly higher than the index's peak of 5,669.67 in mid-July.
Levin believes that investors who continue to invest in cash equivalents yielding above 5% face the risk of lower returns (the assets under management of money market funds hit a new record of $6.15 trillion in the past week), and she urged investors to turn to tax-free municipal bonds with maturities of five to seven years, where yields have been falling less than those of long-term U.S. Treasury bonds.
In addition, given that U.S. stocks typically rise strongly in presidential election years, Jason DeSena Trennert, head of Strategas, believes that short risk assets before Election Day on November 5 may be dangerous. He wrote in a report sent to clients that it is common practice for incumbent presidents to take some measures to promote economic growth in order to win re-election, but "the actions taken by this administration have reached a level unprecedented in U.S. economic history."
Payments of the IRS's restarted Employee Retention Credit, which previously pumped $232 billion into the U.S. economy but which Trennert says is rife with fraud, are expected to be paid in early September, with another $20 billion to be paid by the end of the year, according to estimates by the Strategas Washington research team.
On the other hand, the U.S. strategic oil reserves have fallen to their lowest level in 41 years, and releasing them has reduced Americans' gasoline bills as the Middle East is on the brink of war, Trennert said. At the same time, the U.S. Treasury has lowered long-term interest rates by issuing short-term Treasury bonds, which Trennert said is "a short-term strategy designed to cover up the long-term economic consequences of a budget deficit of 7% of GDP."
The day to pay for these fiscal excesses will come sooner or later, "however, in the short term, the combination of large fiscal deficits, reduced issuance of long-term bonds and Fed rate cuts may boost the performance of financial assets," said Trennert.
For now, the situation of the U.S. economy and markets is indeed improving, but this may come at the cost of worsening economy and markets in the long run.
