This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:
Are things terrible, or wonderful? Neither.
Ten-year Treasury yields have surpassed 5%, at least briefly. These high yields means higher interest rates for mortgages and car loans. It means it’s going to get costlier for businesses small and large to borrow money.
That’s going to put a strain on the US economy. It’s already put a heavy damper on the housing market. My colleague Brian Sozzi flagged (again) the warnings from high-profile executives like Jamie Dimon and Elon Musk on their earnings conference calls. There will almost certainly be more. (Bill Gross just weighed in on the potential for a recession in the fourth quarter).
While dire warnings make good headlines (and, ok, entreaties to ignore those warnings also make good headlines), as usual it’s pretty easy to find evidence to support both scenarios.
Consider the outlook for consumer spending, as outlined by David Kelly, chief global strategist at JPMorgan Asset Management, in a note to investors: “Despite a low saving rate, slow demographics, depressed confidence, a crippled housing market, rising interest costs and growing credit problems, we estimate that American consumers increased their inflation-adjusted spending by more than 4% in the third quarter.”
Kelly encompasses both the negatives and positives in that single sentence. It reflects the conundrum that’s been dogging economists and strategists all year: Despite what seems like a multitude of factors that should be weighing on the US economy, it still appears to be growing.
The S&P 500 is still up 10% this year, and the Nasdaq has rallied by more than 20%.
Maybe it’s unreasonable to think, but maybe, rather than triggering paralysis among consumers and investors, the conflicting signals could cause them to hedge. They could (as they have been) keep spending, while at the same time socking away money for a rainy day — or, at least, take a measured approach to risk.
That’s not reflected in the personal savings rate, which, as Kelly points out, has been sliding.
But that rate doesn’t include money market funds, which are liquid instruments that have exploded as rates have climbed. I keep thinking about the first chart in this piece from the BlackRock Investment Institute, which shows the increase in higher-yielding money market investments and the drop in traditional bank deposits that don’t pay much interest, even with rates this high.
So should you listen to Jamie Dimon, or Bill Gross? Should you listen to Brian Sozzi? Should you listen to lil ol’ me? My guess is we’d all agree that whatever your interpretation of the data, staying diversified is usually a good idea.
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