SEEKING STATIS: AN UPDATE ON THE MARKETS

Mike S Shapiro

Seeking Stasis: An Update on the Markets

Given the reality of increased interest rates, layoffs by the thousands in the tech sector and rumblings about recession, the economy is showing unusual strength and the markets are quite the opposite. Frequent readers of this blog know what I always say – that markets will find ways to normalize, much as water always finds its path.

Here’s my take on where we are now and where I think we’re headed soon.

Stock markets seek stasis

The volatility that was caused in part by the pandemic, in part by bored work-from-homers and in part by Bored Ape NFTs has settled down, for now. I also think that fear is ruling behaviors a bit: It shows in the reductions of retail-level-investor transactions and it shows in the types of stocks that have done better these last few months (value stocks vs growth).

But, of course, nothing lasts forever – not markets going up or down and certainly not normalized behaviors in the markets. It’s just a matter of time before people start getting itchy for the next big thing, the next quick riches. Will it be Crypto 2.0?

Inflation, interest rates and impacts of additional increases

Between March 17 and December 14, 2022, the Federal Reserve raised interest rates from .25% to 4.50%. That’s a pretty substantial increase over the course of a year, especially given that rates were held unnaturally low for about two decades.

Forbes.com

The hard truth is, though, that although inflation is slowing, the economy still isn’t where the Fed would like it to be. Given this, I believe that we’ll see some additional rate increases in 2023. I don’t anticipate that they’ll be as quick or as substantial as in 2022, but I do think they’re coming. When the Fed stops is anyone’s guess right now: There are so many signs of strength in the economy that until consumers pull back a bit more and companies slow their hiring (or increase layoffs), this ball is still up in the air.

Labor, layoffs and how a fizzle in tech could impact the rest

Recent labor statistics showed significant hiring strength in areas like hospitality, transportation, retail and restaurants – all industries that took a beating during the pandemic. This is good news on many levels, but here’s the flipside of that. The industry that went gangbusters during the pandemic – tech – has pulled back in a major way. Layoffs in tech leaders like Alphabet/Google, Meta/Facebook, Amazon, Microsoft, Zillow, Netflix, Zoom and others are making headlines on a near-daily basis.

Statista.com

Certainly, many of those jobs were just created during (and because of) the pandemic, so we may just be headed back to a pre-pandemic labor level for those companies. The trick here is that the tech-sector jobs pay so much more than those in hospitality and retail and the like, so the impact is much greater across all industries.

Here’s why: The result is not only a net loss of personal income but, as that ripples out into the larger economy, it’s also a net loss in local, state and federal revenue (including for many of the businesses that have just hired new staff) and tax income. The overall effect, then, could be shrinking economies in primary and secondary tech hubs – like Silicon Valley, San Francisco and Seattle, of course, but also Austin, Phoenix,  Raleigh-Durham and a slew of other secondary tech hotspots. 

Residential real estate is wobbling, but not collapsing

As go the markets, so goes residential real estate, typically. Stocks have been highly volatile over the last several months and we’ve seen about the same in certain real estate markets, despite the interest-rate increases – while transactional volume is lower, sales prices have stayed up in many markets and collapsed in others. Lack of inventory continues to be the primary driver there and, in my opinion, that could change a bit soon.

Here’s why: Given the potential softening in labor markets (and thus reduced income) in high-end primary and secondary real estate markets, there’s likely going to be some price softening in residential real estate, too (although not all that buyers may hope for). 

However, what *could* happen – and, if it does, it *could* work in favor of buyers – is that people who own multiple homes may decide to offload some if either a) they lose jobs/income and thus, need to free up some cash/reduce debt or 2) the geographic areas in which they have rental units lose jobs/income and thus, they can’t get the rents they need to hold onto their investment properties. This is especially true if they’ve got adjustable-rate mortgages and have experienced not-insignificant increases to their mortgage payments.

I don’t anticipate this making a huge positive difference in the inventory levels anytime soon, but it could help ease some of the challenges for some lucky buyers.

Household debt climbs to record highs

One facet of the economy that we haven’t discussed in a while but that’s essential is household debt: The Federal Reserve Bank of New York recently released a report indicating that it has reached an all-time high at roughly $16.9 trillion.

Much of this is driven by mortgage debt, which isn’t the worst kind of debt to have (unless you can’t afford your home). However, credit card debt is at an all-time high, too, which indicates that people are spending beyond their means. Is it that our taste for luxury goods can’t be quelled? Or that the higher cost of milk and eggs and toilet paper has people turning to credit? The answer’s still a bit unclear; likely, it’s both.

Federal Reserve Bank of New York

And while not exactly in the category of household debt, what’s also scary to me is the ticking time-bomb of hidden leverage in the stock markets and other asset classes that I talked about many posts ago. It wouldn’t take a whole lot of shakeup in this area to unsettle a whole lot of households, is my guess, simply because of the math of the markets over the last few years – people had to be leveraging assets at an incredible rate to drive such volume and velocity. Whether or not they need to pony up will be something to watch in the months to come.

Geopolitical uncertainty is the ball that could drop hardest

After the wild ride of the last few years, I don’t mind a bit of a pullback and rebalancing of the economy if it’s driven by the Fed. What I do fear, though, and what I don’t think most of us are paying quite enough attention to (in part, because we haven’t got a lot of information to help us) is that the tensions between the US and China and the US and Russia will eventually, I think, reach a tipping point.

To be clear, I don’t believe we’re looking at war. What I do think can happen, though, is that the situation/s will result in additional pressures on local and global economies that we’ll begin to feel much more than we do now. That, coupled with the other economic balls in the air, could lead to a more intense recession than the soft landing that many economists predicted and wished to have.

In sum

A couple of inevitable issues compress the economy a bit (those being any mix of higher interest rates, a pullback on home buying, a slowdown in hiring, a few more layoffs). Even as those circumstances ripple their impact, though, I don’t think we’re looking at a crisis, like 2008. 

The question is always what people will do with what they’ve learned and whether they read the tape well. To me, the way to find opportunities now is no different than at any other time: Look around, pay attention, learn as much as you can, don’t get caught in the quicksand, put emotion aside and trust your gut.