The Resilient Consumer: Economic Strength Amid High Rates

Chris Needs:

I was departing onto a wedding in Austin, Texas when, if you can hear my voice isn’t in the best of health, I did a lot of singing on the bus. On the way back is about a 45 minute bus back from the venue.

Noah Brooks:

Why were you guys singing?

Chris Needs:

That’s what you do.

Noah Brooks:

That’s what you do at weddings. I’m not a wedding singer. It’s like scream singing, scream singing. Oh man. I would’ve hate to be the sober person on that bus. The bus driver.

Yeah, I wouldn’t, definitely would’ve. Yeah, so we were departing after the Good Life Advisor conference and we did a little recap of that yesterday, so I won’t go too much into detail, but we had a great few days in Nashville. We saw a lot of advisors down there. Really good experience and I guess the takeaway that I will put out here is taxes are really important from a holistic standpoint. Advisors need to be aware of it. Clients are asking for it, and it’s something that really should be on the forefront for most advisors and it certainly is for clients. So if you’re out there listening, we’re coming down to tax time, right? Yes, we are a few months away. That also brings me to one thing. So new rules for required minimum distributions out there for anybody that turned 72 in 2023, 2024 is going to be the first year that you’re going to have to take that. That’s a little bit of a change from the past 70 and a half, and I guess people can defer it until 2025, but then they have to take two distributions in the same year. Taxes are changing. The tax rates for 2025 are official and they’re out there right now. Nothing dramatic in terms of changes, but what do we have going on in the next few weeks? Anything big? We do have the

Chris Needs:

The election, the elections next week we’ll have some impact on tax policy from what we’re hearing. Oh, you think

Noah Brooks:

Now you’re a guy who’s into taxes. Do you think that taxes are going to go up or down in the future?

Chris Needs:

I mean in the long term you would think they have to go up. Do I want them to, that’s a different question.

Noah Brooks:

Seems like they’re going to go up in the future, right? I dunno that we’re going to be able to grow our way out of the,

Chris Needs:

So if you can utilize a Roth, is that what you’re getting at? Yeah,

Noah Brooks:

Absolutely right. I mean we’ve talked about RMDs there for a second. People that are able to contribute to a Roth, that is the best possible way to do it. You put your money in, it’s after tax money and money when you take it out, there’s no tax due for people that are above the income limits and there’s a few people out there that are certainly, you can do Roth conversions, backdoor Roth, things like that. It’s a great way to get money in there and for people that are in the pre-retirement age, there’s kind of a sweet spot there before you start collecting social security, before you start taking required minimum distributions, but maybe after your peak earning years, kind of the sweet spot to be able to take money from your traditional IRA, roll it over to your Roth and there’s some people out there that if they don’t have a lot of earned income to be able to do a fair chunk of change and make it really worthwhile, the longer that you have to make it happen, the better it is because the Roth has no required minimum distributions.

That’s a key point to the whole thing and for anybody out there that has the option of a four one K that has the Roth side to it, if you are not doing that, and I know some people say, well, I’m in a high tax bracket. I want to get the most I can from a deduction or not a deduction, but a deferred on taxes. Putting the money into the Roth now. Oh man, the compounding and the fact that you don’t have to take it out for required minimum distributions. It doesn’t get much better than that, especially in the 401k, I’m a hundred percent of my contribution is going into the 401k. The off side of it. You’re going to tell me that you don’t use any of it.

Chris Needs:

I’m looking at it.

Noah Brooks:

Oh my goodness,

Chris Needs:

I just have a problem with taxes. I’d rather not pay ’em ever, but I should be smarter about,

Noah Brooks:

It’s a personal, in the long run, you’re going to wind up paying more taxes by not paying them. Now

Chris Needs:

You’re not wrong.

Noah Brooks:

Okay, everybody,

Chris Needs:

Back to our regularly scheduled

Noah Brooks:

Programming here. Yeah, let’s come back to this. You know what we should do is we should get a tax, not a tax for bear. We should get someone who specializes in RMDs and taxation on here just to give us a few pros and cons. A little special for tax season. Yeah, a little special for tax season coming up, even though it’s not really tax season, but end of year tax loss harvesting is coming up, tax planning and the election. All right, so I said it’s seven days till the election. I think we’re on knife’s edge depending on who you talk to. They either know Donald Trump’s going to win or they know vice President Harris is going to win. Right. They know. They absolutely know. I don’t know who’s going to win. I have no idea. You have a thought, not who you want, but

Chris Needs:

Yeah, I mean you see a little bit of this Trump trade coming back. Bitcoin’s doing its thing. You hear this Trump trade that may be gaining a little steam. You may say the market’s bet a certain way right now, but it’s a tossup. It’s all about turnout at this point. I’m sure everyone’s made up their mind. I would guess even early voting is at least concluding I think today in Pennsylvania, but it’s all about turnout.

Noah Brooks:

Yeah, yeah, there’s no question about it. If the Trump DJ JT stock was an indicator, it would probably be indicating a win for him because after the, we’ll call it a botched debate, DJT went down and I think it got down to like 13 bucks a share, 12 bucks a share from 35 or 40. It went all the way down and now it’s come all the way back up even though it only has no earnings. No earnings, almost no revenue, something like that. Do you like companies like that? There you go. It’s not my cup of tea, but there’s a lot of people out there that I know that have bought it personally, so I guess it could be an indicator. It doesn’t seem likely that it’s going to do anything but for an indicator for the election possibly.

Chris Needs:

I don’t take my betting odds from companies like that. Me

Noah Brooks:

Personally. Yeah, no, I wouldn’t do that. I wouldn’t do that. But yeah, I mean there’s definitely who you talk to is where you are. Those biases out there are running really hard right now and I don’t think anybody knows. I think it’s kind of one of those unknowable things. It doesn’t seem like the market cares. To me it’s really about earnings. I think you’d said earlier Google came in and crushed it this afternoon.

Chris Needs:

Yeah, they had great numbers. That’s what we like to see. Obviously those mega caps doing well, we would like to have them back outperforming and then keep the market doing what it’s been doing. Because I know you commented on our last one, the mag seven haven’t necessarily been pulling the cart as much lately, so if they start chugging again, that’d be a good thing. I’d rather see the small caps rally. Personally, I’d like to see everything rally. I was surprised yesterday, so where we’re at right now is yields are still coming up. I’ll call it pretty aggressively all of October, but small caps yesterday had a strong day. Something you wouldn’t expect to see.

Noah Brooks:

Yeah, no question about it. You had mentioned yields coming back up. Mortgage rates are actually significantly higher than they were a month ago, shortly after the fed raised. I think the average 30 year in the US is back over six point a percent.

Chris Needs:

The 10 years up to over 4.3 again, so yeah, highest they’ve been since early summer I would say, or late spring

Noah Brooks:

Yields if you will, normalizing the 10 minus two, meaning the 10 year yield minus the two year yield, which was inverted for I think 30 months plus inverted after the federal reserve lowered and now we’re at 16 basis points difference between the two, meaning the 10 year higher, it’s the highest it’s been since May of 2022. So a normalization in yields where the longer you go out, the higher it is and not a lot 16 basis points. It’s not going to make or break the day, but seems to be moving in the right direction

Chris Needs:

In tandem with that. We have the ag in its longest draw down ever 50 months. The next longest is 16 months, so obviously a very dramatic drawdown in terms of length spreads are super tight right now. I know on high yield spreads it’s down to below 2.9 again, which is the tightest since June of 20 2007. So

Noah Brooks:

There’s a few different ways to look at that. It’s like, okay, the economy is working so hard and everything is moving in the right direction, so these spreads are so tight and you could make a case that when it gets low like this, it’s time for the economy to start slowing down.

Chris Needs:

And historically if you look at it, that’s sort of what it does say right now we’re looking at a snapshot history. It’s because fundamentals are great and right now the market isn’t forecasting a recession. That’s what high yields are telling you if you look at them sort of van vacuum. But in terms of historically when spreads are this tight, you do have smaller returns on both equity and on credit. If you look out on a five-year time horizon historically, so it may not be the best thing. It’s not a terrible thing. Obviously we don’t want spreads to blow out because that means something’s breaking forward. Returns aren’t the best when spreads get this tight. Generally I think

Noah Brooks:

What it means is if you don’t currently own high yields, it’s probably not the best time to start a position in high yield bonds. If you’ve owned them and owned them for a while, you’ve made some decent money. Not only have you had appreciation, but you’ve always had some really good interest. Right. I mean there’s no question about high yield as a much better total return over the last few years than the bond ag or corporates, things like that. So if you don’t currently own high yields, I wouldn’t be buying them, but I don’t know that it means that you got to get out at the moment.

Chris Needs:

Yeah, interestingly, if you look at s and p 500 forward returns over five years in that scenario, so what we ran was the tightest 20% of spreads. The forward five year annualized return is 2.9% per year. So obviously that’s not what we’re used to. That’s not what you expect. That’s not necessarily near average of what the s and p 500 returns and high yield credit returns on average in those scenarios. 4.9%.

Noah Brooks:

Yeah, looking back, I was running actually numbers today and yesterday. The total return for the s and p 500 for the last 12 months, not year to date for 12 calendar months is over 40%. I mean, if you miss that rally, if you’re an investor or an advisor or someone that likes decent returns and you missed that rally because you were worried about the war in Ukraine, you were worried about the geopolitical situation, you worried about the election here. If you missed a 40% rally in the s and p 500, you really did yourself an injustice over a long period of time. In terms of building wealth, it’s very difficult to get that money back. I mean you have to be right after being right after being right to make up for that return

Chris Needs:

And those same people will be tempted now to try and catch up and that’s right when just as Mr Market does seems to get you in trouble.

Noah Brooks:

Yeah. Do you think the rest of the year is going to be just as calm over as the last month?

Chris Needs:

I personally don’t think so. I think we’re going to see a little bit of a lull after the election. I mean we have run up right into it, so we just came off six straight weeks of wins on a weekly for the s and p 500. The NASDAQ actually continued that streak seven weeks. Normally I would say before the election you’ll see some jitters, maybe a Vick spike, but since we didn’t get before, I’m starting to think we might see it after just my personal take,

Noah Brooks:

So by the rumor sell the news type of scenario.

Chris Needs:

I think that’s fair.

Noah Brooks:

Normally with an election coming up, and I say normally I don’t have anything right here except anecdotal data, but everybody gets a little bit crazy when there’s an election coming up and yeah, I think there’s an air of an anxiety when I talk to people no matter who they’re voting for, everybody seems a little anxious. The market does not, which I think is great. It’s a great sign for the economy that the economy is strong, corporate profits are strong and the consumer is very, very resilient.

Chris Needs:

Yeah, that’s one thing we heard this weekend, how resilient the consumers been and we’ve sort of been aware of that. We’ve been talking about it as well. We just hang in there. You hear those headlines like credit cards above 1 trillion and all these things delinquencies ticking up all these different headlines, but in the end, if you’re looking at the dollars being paid, you look at the real wages which are still hanging in there and right now far above inflation, at least I consider it far above what say about call it percent and a half higher than inflation. That’s good for the consumer. They’re the people spending the money.

Noah Brooks:

I would like to see mortgage rates come down. We had some data last week with new home sales, or excuse me, existing home sales and they kind of underperformed a little bit. It was on an annualized basis. It was probably the lowest in, I think it was 16 years,

Chris Needs:

15 years. I have a stat that is slightly outdated. I didn’t see any updated September numbers, but through the first eight months of the year, housing turnover felt at 2.5% over those first eight months of the year, which is the lowest in over 30 years. So think about when rates do eventually come down, hopefully think about all the money locked up and all these houses that have appreciated. Everyone talks about money markets and how much of that will flow into equities or bonds. I’m not so sure a high percentage of that will filter down.

Noah Brooks:

Wait, hold on. Why do you say that?

Chris Needs:

I think a lot of people look at the money market. They took it from their banks, their sort of cash cushions and put into money markets. I don’t think it was natural market dollars if that’s a thing. I think when it comes to the housing market, people will start putting, pull money out of their house, do refi when the rate comes down to something reasonable and there’s a lot of wealth flocked up there that I think people will be doing more things, whether it’s just flat out spending in the economy, whether it’s additions or new cars or maybe a boat and they’ll do something good with it. Unlike these money market dollars that maybe only 20 or 30% maybe might flow into the market.

Noah Brooks:

I can see when yields go higher. Longer term yields, not short term yields. I can see when yields go higher, money coming out of the money markets and going into some longer term whethers, treasury CDs, corporate bonds, bonds. One of the big issues with people putting money into the money markets over the last year or two has been that short-term yields significantly higher than long-term yields, and there was really no downside. I mean, there’s an opportunity cost to having it in the money market. I just said that s and p’s been up 40% over the last 12 calendar months, but from a behavioral standpoint, from a sense of safety standpoint, there’s no downside or there hasn’t been a downside to clipping a 5% coupon with virtually no risk in a money market mutual fund and not having to worry about whether it’s running a bond ladder or what rates are going to do. Just knowing that you’re getting your 5%, and this is why I say I think as rates go up and the short term either stays flat or comes down with the federal reserve lowering, I think the money might flow out of money market funds into some longer duration treasuries or CDs or something like that.

Chris Needs:

I think that’s a rational decision and I hope you’re right. I just don’t think a hundred, obviously never a hundred percent, but I just think about what I did. I took my excess savings and I essentially put them into my account, put ’em into my market, got the extra yield since we’ll say Wells Fargo’s paying like 0.1%, so I wasn’t going to leave it in there and that’s an opportunity cost for not doing anything and I moved it, but I’m not going to then leave that all in there. Eventually I’ll probably shift some of it back. I don’t know what percentage haven’t gotten to plan that out yet, but I think there’s people like that where it’s like some of that money isn’t earmarked for the market.

Noah Brooks:

I mean everybody wants a little bit of cash on hand for an emergency and depending on who you talk to, maybe it’s a few months. I like to think more like six months to a year. Some people who are a little bit more conservative who may have a higher net worth, depending on what their job situation is, they could have up to two years worth of cash on hand and it doesn’t have to be in cash, but money markets, cd, something like that. And it really gives you the confidence to ride up and down in the market when you have that type of cash on hand. So you don’t have to be worried about, oh listen, if the market goes down by 30 or 40% in 2024, 2025, I’m going to have to get a second job or I’m going to have to change my way of living. Well, I have two years of money right here on the sidelines and it just gives you that little bit of extra confidence. I recommend a few months at a minimum. Minimum. At a minimum. I run into people all the time that don’t, I mean it’s not a paycheck to paycheck thing, but they just don’t have a lot of money saving money invested income, but nothing in no real substantial money in liquidity products.

Chris Needs:

I mean with how markets have been. Maybe some people have gotten comfortable with just having it two, three days away via a CH to just pull it immediately out of the market. But then you have to deal with fluctuations if you have an ill timed cash need. Yeah,

Noah Brooks:

Yeah, we don’t want to deal with that. You mentioned the lowest turnover, right? Lowest housing turnover, and obviously mortgage rates are really going to play into this at some point though. Rates are, we’re expecting rates to come down. Do I know that they’re going to come down? No. And certainly not 10 year. The expectation is for shortterm rates to come down, but overall, the whole curve to come down, is it possible that rates, especially mortgage rates don’t go down at all?

Chris Needs:

I think the fear is, and we’ve heard a couple Fed guys talk on thinking specifically Kaari has mentioned our deficit spending and our debt growing almost exponentially at this point is going to push the natural rate up. So neutral isn’t going to be maybe in the two and a half percent range. It’s going to push it up because people are going to have to take an extra risk premium for our ballooning debt. Now that the GDP isn’t outlandish yet, but the nominal overall debt level is very high, and I think that will have the long end elevated.

Noah Brooks:

One of the things that has really been working this year is gold, right? Precious metals, and I mean gold’s up over 30% year to date. And a lot of people are starting to say there’s a reason that gold’s up and it has to do with the national debt, not so much inflation, but the fact that we do have an election here, we don’t really know what’s going to happen. And if we’re in a situation where there’s dramatic cost cutting that comes into play. I mean, Donald Trump’s talking about Elon Musk coming in and trimming $2 trillion from the Doge department. I couldn’t possibly come up with $2 trillion in cuts. I mean, that’s basically cutting a lot of the social services, whether that’s Medicare, Medicaid, social security, that would involve big cuts there. But the fact of the matter is that the debt service, the interest on the national debt is something close to a trillion dollars.

Chris Needs:

I think it’s up to 1.2 now that that’ll change next year if rates start coming down a little bit. But for this year, I think that’s what we’re looking at for a year end number.

Noah Brooks:

That is a lot of money to be paying on your debt. They should do some type of consolidation loan.

Chris Needs:

Yeah, they should refi,

Noah Brooks:

Right?

Chris Needs:

Not these rates.

Noah Brooks:

Yeah, I know. Well, that’s what it is. I mean, rates come down. It’s better for that number on an absolute basis, but we can’t just continue to rack up the national debt. There’s got to be some type of, I don’t know if it’s a come to Jesus moment, but the markets will eventually give politicians a come to Jesus moment.

Chris Needs:

And strangely we’re seeing the dollar up though during all this with gold up,

The dollar’s been outperforming the Euro and the yen. So I mean the main reasons behind that are we have a higher real interest rate than them. We’re at about 2.5%. The Euro is at, I think 1.5% in the Ys negative obviously. And we have better growth than them. We have much better growth than the European right now. Their economy has been sort of slow. They’re more, I feel like my opinion of them is like a value area, value stock area. I just have that opinion in my head. I don’t know why of Europe. Yeah, it’s just compared to us we’re growth, their value. It’s just been this thing in my head for a long time now and we obviously have much fair growth than Japan as well.

Noah Brooks:

Is that a regulatory outlook? Do you think that their growth, they have tech companies, right? They do. I mean they don’t have the Googles and Microsofts of the world, but they have a lot of large tech companies. They just have not performed near as well as our tech.

Chris Needs:

Yeah, we’ve talked about the regulatory scrutiny over there, which is much higher than ours. It seems like in everywhere. Even if you talk about food, they’re more strict with their regulations. It just may be as part

Noah Brooks:

Of the safety, health and safety.

Chris Needs:

It just seems like that’s a part of their culture and their thing. And I think we talked about before, if you’re going to start a new business and it’s a growth business, you might want to come here rather than there. But they do have a SML, that’s one of their big ones over there. Arm is in Britain, I believe though. I dunno how that gets Netherlands. Netherlands, okay. So those are two big ones, but from the tech side, growth tech side, there’s not much over there.

Noah Brooks:

I mean from a growth standpoint, the United States has certainly killed it versus the rest of the world. There’s no question about that. And some of the brands out there, as I say it, the first thing I think of is McDonald’s and Boeing and obviously Microsoft and Apple, but McDonald’s and Boeing have been getting kicked in the teeth McDonald’s a little bit over the last few weeks, right?

Chris Needs:

They had a little e coli outbreak in the quarter Pounders, yeah, I guess one person was unfortunately passed away and then there was like 75 injured is the number I saw. So not good for the headlines for sure, but then Boeing just dealt with their strike. They just came out of it. Apparently they cut a deal in the round of 35% annual compensation or not annual, 35% compensation increase I guess over the contract. Nothing with the pension. That was a big sticking point for a long while, but the estimates are of like 5 billion lost from almost a two month strike.

Noah Brooks:

Yeah,

Chris Needs:

It’s a lot

Noah Brooks:

Of money. Not only did they lay people off, but their suppliers laid people off. Right. They didn’t know how long this was going to go on. They had issue shares too, right? Yeah. I think that was today, if I’m not mistaken, or yesterday. I’m going to go back to McDonald’s for a second. I don’t know if anybody out there listening tried the chicken Big Mac. I did one over the weekend. It was gross.

Chris Needs:

I tried one. I didn’t think it was gross, but I mean

Noah Brooks:

Still McDonald’s, there’s something about that Big Mac sauce and I’ll eat a Big Mac, but there’s something about that Big Mac sauce on chicken that was just strange. Yeah, it really did not appeal to me in any way, way While we’re on food. There was a stat that came out this weekend. It says the average American eats upwards of 80 pounds, 80 pounds of sugar in a given year. And I actually thought about it and I vacillated in my mind, do I eat more or less than 80 pounds? I think I might be over.

Chris Needs:

I don’t even want to know what my level is. The soda King. That’s me. Did you drink a lot of soda at the conference? Less than I would’ve if I was at home. Oh really? Yeah, probably. Is that They didn’t do Canda today? No, they did. They did have soda. I probably had two cans a day, 80 pounds a year. That is a lot of soda to drink. Think about if you bag that out, you just get sugar and put it in. That’s enormous. Yeah,

Noah Brooks:

That’s a lot. So we do have a little bit of economic data coming out later this week. We have the jobs report coming out. Anecdotally, I’ve seen some situations where companies are holding off on hiring until after the election. Last month we had kind of, I dunno if it’s a blowout, but it was 245,000 and I think the consensus was for 145,000, I guess that would be a blowout. And the month prior to that, it was more like a hundred twelve, a hundred fifteen one. Yeah, one 14.

Chris Needs:

They’re calling for one 20 on Friday.

Noah Brooks:

So where does this go? We get another, if it starts with a two again and they’re still calling for 1 45,

Chris Needs:

That will make it tough. That will make it tough to cut. I would argue we got jolt data today. That was good. If you’re looking at it from the perspective of wanting another cut, 7.4 million jobs open versus 7.9 million was expectation. So that’s pretty cool from the economic perspective. But yeah, if we get another 200 handle on jobs, I think we’re going to see those odds, which I think are around 90% or so of a quarter for a quarter point cut. I think that’s going to go down pretty quickly if we have a two handle again. So

Noah Brooks:

Hire for longer is real,

Chris Needs:

Potentially. Yeah.

Noah Brooks:

I had the pleasure of meeting one of our advisors at the conference first time that I’d met him and he says to me something to the effect of, I think the Fed lowered too much too early. And I started saying that inflation is coming down and PCE is at like 2.6 and core inflation is down dramatically. And he didn’t want to hear it. He said to me that without question, they’ve lowered too fast and they only had one

Chris Needs:

Rate cut. Obviously anyone can debate the merit to be their side and we heard the other side of it when they didn’t cut in July and then people were angry with them for that. But Core has been above 3% for 41 months. Now that is the longest streak back to, well, it was a gigantic streak. It was the late seventies to early nineties, but we hadn’t experienced that from the early nineties on. So I can see maybe where they’re coming from. We’re just going to reignite the fire potentially. But in the short term, I don’t think inflation expectations are going to be unhinged and go back upwards. Yeah,

Noah Brooks:

I hope not. I mean, inflation is going to be, it’s going to be the talk of the town for the next week, maybe even for the next year. Alright, well that wraps it up for us. I want to thank everybody for listening today. Advisors, investors, anybody else that’s out there for the market enthusiast, I’m Noah Brooks and with me. Chris needs any questions, comments, concerns, anything that you want to talk about, send them our way, marketenthusiast@goodlifefa.com. We’ll see you next time.