Too Hot

Despite the predictions, we disagree with the pundits’ who say that rate cuts will begin next year. The economy is still “too hot” for the Federal Reserve to consider rate cuts. 

Of course, there are always signs of slowdowns in various areas of the economy, but housing prices, food, and other important day-to-day costs are still very high. When is the last time that your dry-cleaning bill went down? 

Not only is the economy too hot but worldwide temperatures have been so hot that it has caused so many problems including increased moisture which has caused flash floods in many parts of the world. Insurance costs are rising broadly because of the damage that extreme weather conditions bring about. 

Let’s talk taxes…  

For many cities across the country commercial real estate is suffering. The lower real estate values decrease the tax role thus giving municipalities lower revenue.  

In June, leisure and hospitality employment and construction employment figures were both strong. Financial services, information technology, and manufacturing were weak and shed jobs. The services sector therefore led the way. These jobs are easy hire, easy fire positions. It is noticeable to most folks that restaurants, hotels, and travel services are doing well. This was an expected outcome post-pandemic.   

Will the spending slow down? We believe it will. Since consumers are 70% of the U.S. economy how will this affect gross domestic product? 

The stock market had been driven up until the end of May principally by 7 big technology companies. Since then, the rally has broadened out. The unexpected liftoff of the Standard & Poor’s 500 left many investors in a “FOMO” mode. FOMO means fear of missing out. This is the reason that we stress diversification to deliver results, no matter what the investing climate might be.  

If one has true diversification some investment assets will go up in value as others go down. This structure helps to smooth the ride. At times, the bumps along the way have been quite unsettling, particularly to older investors. A mix of assets can be aggressive and protective at the same time.  

Political issues, monetary, and fiscal policy remain underlying causes of concern for equities. However, it is earnings and the multiple applied to those earnings that move stock prices.   

Artificial Intelligence has been all the rage and we are not sure if society will ultimately benefit from it or not. Will people eventually allow computers to do the thinking?  

Today the 10-year treasury yield rose to over 4%. As the Wall Street Journal reported “One reason the economy keeps humming along is because a huge chunk of consumer debt still carries low rates including mortgages and auto loans made before 2022”. This has been a huge benefit to the economy.   

The economy has also been a big beneficiary of lower oil prices. We are not sure that this trend will continue given comments by Saudi leadership and the new budding friendship between Iran and Saudi Arabia.  

In short, the second half of the year, we believe, will be met with increased volatility amidst the debate over the interest rate cycle.   

Albert Einstein said, “Many of the things you can count, do not count. Many of the things you cannot count, really count.”  

You can most certainly count on us.  

Stay cool and hydrated.  

As always, 

Seymour W. Zises