Heels on the ground!

That’s how my colleagues welcomed me at our annual holiday meetings in Phoenix this week. Advisors there and at The Breakers in West Palm for the annual Barron’s Advisor Women Summit later in the week wanted to “see those shoes.” The competition at The Breakers was impossible! I must go shopping! Along with lots of others. The Sunday after Thanksgiving saw air traffic hit an all-time record of 3.1 million passengers, more than 9% above 2019 levels. Black Friday online spending jumped 10% y/y. Longer term, the consumer should fare well due to a still-robust labor market (more below). One thing the consumer hasn’t yet bought this cycle is a house, but mortgage applications for purchases rose 5.6% in the week ending November 29, the fifth increase in a row. Meantime, Goldman Sachs says potential Trump tax cuts represent an “upside risk” of 20% to their S&P 500 earnings outlook. The Nasdaq and the S&P are at new highs, as are the Magnificent 7. It’s seasonally a strong time of the year anyway. Animal spirits are making an appearance, with bitcoin at $100K, IPOs booming and high beta stocks breaking out. Inflows to equity ETFs have been particularly robust, and momentum stocks are trading at a historically strong premium. One difference between now and the late 1990s is the much stronger earnings and free cash flow margins in high-momentum stocks. Still, the level of equity market bullishness recorded by the Conference Board’s Consumer Confidence Survey exceeds even that seen in the tech bubble. Also of note, foreign private purchases of US stock are at an all-time high—which has historically been a contrary indicator. December and January are seasonally strong months, but excessively hopeful sentiment is a risk.

Indeed, when a banana duct-taped to a wall can sell for $6.2 million while obscure cryptocurrencies soar, there are plenty of signs of excess. Hopefully that won’t have been the bell ringing in retrospect. But, indeed, the US is particularly strong versus the rest of the world. The Atlanta Fed’s GDPNow tracker says we’re currently poised to post Q4 growth at a 3.1% rate. There is little evidence that a recessionary bear market is at hand. Fed Chair Powell indicated that he will proceed at a deliberate pace, saying that the strong economy and sticky inflation mean the central bank “can afford to be a little more cautious.” This, as news elsewhere has been bracing, with governments collapsing in the heart of Europe. Germany will have new elections this winter, but France cannot do so until the summer. Further east, Romania and Georgia are grappling with political uncertainty and the South Korean president briefly imposed martial law on his country (!). Truly, America has been blessed. The center of the AI revolution, the US has more computing power than the rest of the G20 combined. US market caps have soared, but strong earnings give a reason for the bounty. This should be the third straight year that earnings and forward P/E multiples both rise by more than 10%. President-elect Trump will be negotiating with China from a position of strength, as their economy is weak even before tariffs are imposed. Global manufacturing PMIs have mostly been soft, but the US has seen improvement lately. A trade war could blot out that progress quickly. Plus there’s the debt.

All year, the most common question I’ve received is, “When will the ballooning US debt bubble burst?" At $36 trillion, we owe a hundred thousand dollars for every man, woman and child in this land. With the federal government evidently intending to add $2 trillion a year to that total for the foreseeable future, how can the debt ever be controlled? Where even will the money come to buy that debt—and will the Treasury soak up too much of the available investment capital in the process? No one knows the answer, so we wish Elon and Vivek Godspeed. If you’re worried about the situation here, spare a thought for that of Japan, where the population is ageing and government debt stands at 250% of GDP (versus 120% in the US). Or that of France, where the political instability has raised the spread between its bond yields and Germany’s (also essentially without a government). Greece now sports lower bond yields than France. Advisors this week complained of rising client interest in cryptos and “double leveraged” crypto-related ETFs, one calling it “the biggest Ponzi scheme in the history of the world.” As this conversation got more and more interesting, he wondered, what if Elon Musk is Satoshi Nakamoto? Or if it’s the government? “Print Bitcoins and pay off the debt!”            

Positives

• A Fed-friendly jobs report The labor market rebounded in November from October’s hurricanes, adding 227K jobs against expectations for 200K. The unemployment rate ticked upward to 4.2%. Average hourly earnings gained, up a strong 4% y/y, but all the beat was due to sector and rank mix shift. The participation rate fell to 62.5%, although the prime age participation rate was steady at 83.5%, near the highest level in the last 23 years. The "household survey" was much weaker, contracting by 355,000, possibly due in part to the contraction in immigrant employment.
• Big purchases The University of Michigan’s Consumer Sentiment Index rose to 74.0 in December, slightly above expectations. Sentiment among Republicans rose 12.5, while for Democrats it fell 10.7. One-year inflation expectations rose to 2.9%, but 5-10 year expectations declined to 3.1%. The overall brightening mood is reflected in big-ticket purchases. Mortgage applications have risen nearly 25% over the past four weeks, while light vehicle sales are at their highest level since May 2021.
• Trade, construction both solid The US trade deficit fell $10 billion in October, to $73.8 billion as imports declined faster than exports. The oil surplus increased, while the nonpetroleum component saw a smaller deficit than before. Construction spending rose 0.4% m/m in October with residential spending leading the way, perhaps due to rebuilding after the hurricanes. Construction of computer and electronics facilities fell 2.1%, which might mean that CHIPS-act spending is down.

Negatives

• All a matter of perspective The ISM Services Index fell 3.9 points to 52.1. Nonetheless, this is not all bad news since much of the stickiness of core inflation is on the services side. If that can come down, lower inflation may follow. The ISM’s Manufacturing Index rose to 48.4. Respondents to the services index worried about the impact of tariffs on the cost of inputs; on the manufacturing survey, the reverse was true, with producers optimistic about increased production.
• Is the consumer safe? The Federal Reserve’s Beige Book rose from the prior reporting period but nonetheless remained less upbeat than a year ago. The report showed price-sensitive consumers with softening demand for discretionary spending, sticking to essentials and substituting lesser-quality items. Maybe this is further evidence of a bifurcated recovery, whereby the affluent are fine while the less well-off are stretched thin.
• Factories stumble Industrial production in Germany fell 1% m/m in October, following a 2% m/m drop in September. Energy production fell sharply, but manufacturing and construction were weak as well. Domestic orders fell 5.3% m/m, and the headline manufacturing PMI stood at 43 while construction fell to 38. In the US, factory orders rose 0.2% in October after a revised decline of 0.2% in September. Nondefense capital goods excluding aircraft, a broad gauge of business spending plans, fell 0.2%.

What Else

Some things I’m sad to see Per a Senate investigation, American, Delta, United, Spirit and Frontier airlines made $12 billion on seat-selection fees between 2018-2023. American, at least, is trying to catch people boarding before their group. In retail news, designer brands have raised prices at twice the inflation rate, prompting bargain hunting and substitution. 

Some things I’m glad to see Australia has banned social media for children under 16—hurray!—making it the first country to do so. In other tech news, a new “AI grandma” has been launched that will talk to phone scammers so as to waste their time.

Not for the faint of heart Inflows into leveraged MicroStrategy ETFs made up nearly a third of the record $11 billion that came into crypto funds last month. Overall crypto ETF assets under management are now more than $120 billion, compared to $160 billion for all commodity ETFs. Bitcoin’s average maximum drawdown in any year over the last ten is -47%, ranging from -20% to-81%.