For the question posed in the headline of the newsletter, most of us would want the light at the end of the tunnel to simply be light as opposed to choosing it to be a freight train. After a year in the stock market as well as the bond market, as brutal as they both have been, everyone would simply like it not to be a freight train at this point coming at them. They would prefer it turn out to be something much more enlightening, beneficial, and expected.

     Years ago, I heard a speaker ask if the people in the room thought that God liked grits. This was in Texas, and the show of hands in the room was pretty much unanimous. Then the speaker said, “You think God likes grits because you like grits.” He was right. What is my point to this theological foodie-referenced diatribe? Our personal biases can really alter our decision-making abilities; we intuitively just want what we want.

     It is a rather interesting dichotomy. Back when I was learning to try to competitively race cars, a guy that was spending a lot of time with me would always say, don't look where you ARE going; look where you WANT to go, and your body will take the actions needed to try to get the car there. This effort was very counterintuitive. His point was- if the car is sliding toward a wall and you stare at the wall, you're getting ready to meet the wall. Look where you want to be on the track! It served me rather well. I never met the wall!

     In a conference call recently with several investment officers, after one person kind of stated some of their views based on the data, another manager asked, So, what would you suggest?

     The simple response was “Prayer.” An extended laugh ensued after that answer, and then the person speaking said, “Well, if you don't have a process for processing data and driving your decisions, actually, you don't even have a prayer!” 

     Herein lies the problem. Markets don't give us what we want. They give us what they give us. So our job here at Capital Research is to constantly look at the data that we see as most impactful and make decisions based on that data and the way we view and process it.

     Recently, a very large insurance company and investment manager did a study, and from that study, they stated that 54% of Americans have stopped or reduced their retirement savings due to inflation. Think about that for a moment. Due to inflation, it is quite obvious that things in the future are absolutely going to be more expensive than they were even six months or a year ago, and yet half of the people surveyed said they don't want to be prepared for it. Unlike me driving a race car, they're not staring at the wall; they’re getting ready to go over the cliff! It seems that half of Americans want to be Wiley Coyote without a doubt and without any thought as to what the consequences of their decision might be.
 

     Another amazing posture that just does not seem to be able to serve people well, and this one actually defies a huge amount of logic. Janet Yellen (former Federal Reserve Chairperson and the current Treasury Secretary for the U.S.) says she's not seeing any signs of a recession in the US economy!

      Maybe this will give her a hint....  Purchase mortgage applications are down -41.80% in 12 months and refinance applications are down -85.72% during the same time frame.

     And The Federal Reserve wants more of the same economic impact to continue to happen!


 

   
   October shook off the worries from the horrible September we had, which was down 10%, and October actually rose somewhat nicely, moving up by 5%. A relief to the bloodletting of stock markets occurring all through the past ten months.

 

   
    But when we look to the most probable motivator for all the drop in stocks this year, bonds still were bringing their devilish tone to the markets. Long-term government bonds dropped another -7% in the month of October! Reminding us of what the Wall Street Journal called the worst bond market since 1842.
 

     
     There is an old adage in the investment business, and it really applies to so many things outside the investment business, “Markets always lose money faster than they make it.” This year's bond market has proven that deeply truthful. I've been in the investing business for more than 36 years now, and this, by far, is not only the worst bond market I've ever seen, I have not seen bond prices this low this century. Their fall has been fast and furious. The silly side of all this is that we had super-low bond prices for a long time, and the Federal Reserve artificially held them to those super-low levels. They were trying to help stimulate the economy along, and while they certainly did that, it overstimulated the economy, and now they're pushing interest rates higher, trying to slow the economy down.

Janet Yellen, the Fed is slowing the economy. There is a recession coming. Believe it.


We will remain watchful!

 

Ken Graves, Chief Investment Officer

Mortgages (click here)  

 

 

As we have constantly beat the drums on, mortgage rates moved on from the record-low territory seen in 2020 and 2021 but are still below average from a historical perspective. 

Though they have breached 7% as of late, the long-term average is 7.71%, and today they sit at 7.23%.

Yes lower than average but more than double where they were 12 months ago!  We noted in our main column how much it has impacted the purchase finance business and the refinance business.
 

Dating back to April 1971, the fixed 30-year interest rate averaged around 7.8%, according to Freddie Mac. So if you haven’t locked a rate yet, don’t lose too much sleep over it. You can still get a good deal, historically speaking — especially if you’re a borrower with strong credit.

 

WANTS, PIVOTS & LEADERSHIP
 

     In the main body of the newsletter, we've discussed the fact that markets don't always give us what we want. It is interesting as I interact with clients and also with other professionals, it really seems to me that other professionals have more wants of the market than even clients do. Sometimes I kind of laugh when people with decades of background in our industry are disgusted because the markets won't give them exactly what they want. Occasionally, I will actually say to myself, “You know this isn't Burger King and you can't have it your way.” But still, people try.

     The current big want in our industry is that so many people want the Federal Reserve to, “Pivot”. They really just want all of the uncertainties in markets to stop. But using the word stop just sounds too unprofessional or “Wall Streetish” so they came to use the word “pivot.” What they seem to really want is simply what they want. People working in our industry don't want to have to work constantly to try to stave off ongoing risk(s) that are currently showing their ugly heads in the markets. People in our profession would love to have things in a “Set it and forget it” posture. And if you could actually do that, I'm not really sure this would even be a profession.
   
   Oddly, there isn't even a solid consensus across our industry on what pivot means when people say they want the Federal Reserve to pivot. Pivot could simply mean stop raising interest rates 3/4 of a percent when The Federal Reserve meets. Maybe raise them a 1/2 of a percent or a 1/4 of a percent. While I would not count on this happening, it probably has the highest percentage chance of coming to pass of the three types of pivots.

     Getting The Fed to Pivot could also mean simply stopping the raising of interest rates altogether. Asking that is likely not going to happen either because it doesn't help the Federal Reserve do what they're trying to do in the here and now, which really is to slow the economy down.
     
     Or lastly, pivot could mean to turn, stop raising interest rates altogether and start lowering them! My view on this last option right now is that it’s simply daydreaming. Which a lot of people actually do from time to time. And if you're retired right now, daydream away; it’s what retirement was built for.

     Our outlook is that a pivot is not going to occur at this point in time. It just doesn't meet the needs, the desires, or mandates of the Federal Reserve Board. People actually think that simply because Canada decided to only raise interest rates 1/2 of a percent, The US might follow that lead. At this point, I don’t know if that's a leading position, let alone Canada being a leader on this topic.

     While we are talking about leaders, let's look at a few of our stock market leaders from the past few years and how they have fared so far this year. As a group, the five leaders from the most recent years I've really fallen much more precipitously than the S&P 500 itself. Only one has outperformed the S&P 500, and yet it too is down about -16% year to date. The rest of them, their results have been completely dismal. This is one of the reasons why we have to closely monitor day by day the leaders of the market. Sometimes that leadership is only in the history books and is not current at all. 
 

APPLE Stock Year To Date

 

Google Stock Year To Date

Amazon Stock Year To Date


Netflix Stock Year To Date


Facebook (META) Stock Year To Date

 

     While these five stocks shown above represent just 1% (5 of 500) of the total number of stocks in the S&P 500 they represent 17% of the total dollar weighting of money invested in the S&P 500.  Leadership is getting hard to come by in a market like this.