With the end of the government shutdown, economic data collection has resumed, offering investors and policymakers clearer insights into the nation’s financial health. The Federal Reserve now faces a critical decision on interest rates amid mixed signals of persistent inflation and a weakening labor market. n nInflation remains around 3%, exceeding the Fed’s 2% target, while job growth has slowed and layoffs have increased. These conditions create a complex environment as the central bank prepares for its December 9–10 meeting, where a potential third consecutive rate cut could be on the table. n nMarket expectations for a December rate reduction have declined to 43%, down from over 100% on October 24. This shift follows public remarks from several regional Fed presidents suggesting caution. Atlanta’s Raphael Bostic pointed to structural labor market changes, such as lower immigration and AI adoption, which may not respond to monetary policy. Cleveland’s Beth Hammack, Boston’s Susan Collins, and Minneapolis’s Neel Kashkari all supported holding rates steady to ensure inflation comes under control. n nTheir stance reinforces Chair Jerome Powell’s earlier comment that a rate cut is “not a foregone conclusion—far from it.” n nLower- and middle-income households are particularly affected by high borrowing costs and job insecurity. The National Association of Realtors reports the median age of first-time homebuyers has risen to 40, up from 33 in 2021. New buyers now represent just 21% of the housing market, the lowest share since 1981, as prices have surged over 50% since 2019. n nRecent data highlights financial stress among subprime borrowers. Fitch Ratings found that 6.65% of subprime auto loan borrowers were at least 60 days late on payments, the highest rate since 1994. Transunion reported that 14.4% of consumers took on subprime loans in the third quarter, up from 13.9% the previous year. n nThe ADP jobs report indicated private employers cut an average of 11,250 jobs weekly through October 25. Meanwhile, small business optimism dipped to 98.2, down from 98.8, according to the NFIB. A net negative 13% of owners reported higher sales, and profit trends fell to −25%. n nDespite these challenges, corporate earnings remain strong. The S&P 500 is on track for a fourth straight quarter of double-digit profit growth. However, concerns are growing about the sustainability of the AI-driven stock rally. n nHistorical parallels, such as the dot-com bubble, serve as a cautionary tale. Cisco’s stock, for example, took 25 years to recover after the 2000 crash. Diversification remains a prudent strategy to manage sector-specific risks. n nUpcoming data releases, including the delayed September jobs report and the Federal Reserve’s meeting minutes, will be crucial in shaping the next phase of monetary policy. n— news from Northwestern Mutual n
— News Original —nShutdown Ends but Economic Questions Persist nBrent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company. n nSince the government shutdown began at the beginning of October, a lack of data has contributed to uncertainty about the state of the U.S. economy. The data we have gotten over the past month and a half points to the persistence of heightened inflation and a weakening labor market—an unusual combination that we’ve covered in detail in recent weekly commentaries. Inflation appears to be hovering around 3 percent, above the Fed’s 2 percent goal, while hiring numbers remain tepid and job cuts are on the rise. n nNow that the shutdown is over, the usual data will return, potentially bringing more clarity to the economic picture. The timing is propitious, with the Federal Reserve meeting December 9–10 to decide whether to lower interest rates for the third consecutive time. n nDespite continued labor market weakness, investors are pricing in only a 43 percent chance of a rate cut in December, down from over 100 percent on October 24 and 66 percent a week ago. This decline is partly due to recent public comments from committee members. For example, Atlanta Fed Chief Raphael Bostic recently suggested that labor market weakness may be a result of structural changes, such as lower immigration and the widespread adoption of AI, which wouldn’t be affected by lower interest rates. Cleveland Fed Chief Beth Hammack, Boston Fed Chief Susan Collins and Minneapolis Fed Chief Neel Kashkari agreed that the central bank should hold rates steady to reduce inflation. These remarks add weight to Fed Chair Jerome Powell’s October 29 comment that a rate reduction was “not a foregone conclusion—far from it.” n nLower- and middle-income consumers have much at stake in the Fed’s decision, since these groups have felt the brunt of the impact from high interest rates and a weak labor market. We can see this dynamic playing out in recent data from the National Association of Realtors (NAR), which reported that the median age of first-time homebuyers climbed to an all-time high of 40 years old, up from 33 in 2021 and 29 in 1981. Meanwhile, new home buyers now account for just 21 percent of the housing market, the lowest portion since the NAR began collecting data in 1981. The median house price is now $415,200, up more than 50 percent since 2019. n nData released last week underscores the challenges faced by lower-income consumers. Fitch Ratings announced that the share of subprime borrowers at least 60 days late on their auto loans rose to 6.65 percent, the highest since the agency started collecting data in 1994. Transunion noted that the share of consumers taking on subprime loans reached 14.4 percent in the third quarter, up from 13.9 percent last year and the highest since 2019. And the latest ADP jobs report shows private employers shedding an average of 11,250 jobs per week for the four-week period through Oct 25. n nThese numbers paint a portrait of everyday consumers that contrasts starkly with the situation of higher-end consumers, many of whom have comfortable savings, fixed-rate mortgages on houses that have appreciated in value and substantial equity holdings. n nIn general, equities have produced impressive returns this year, and companies in the S&P 500 appear set to record a fourth straight quarter of double-digit earnings growth. While stock gains have benefited many households—Americans now invest more money in equities than ever before—a potential downturn could have serious ripple effects throughout the economy. Markets have shown slight signs of unsteadiness recently, with the Bloomberg Magnificent Seven stock index falling 4.8% from the all-time high it set on October 29. Whether a downturn will materialize is impossible to predict, but it’s equally impossible to ignore growing concern about the long-term viability of the AI boom. n nThere is a simple answer to worries that AI-driven stocks may be overinflated: Hold a diversified portfolio that’s not concentrated in tech or any other sector. Overconcentration can introduce extreme risk. Consider the case of tech company Cisco. Cisco played a central role in the dot-com buildout of the late 1990s, propelling its stock to a high of $80 on March 27, 2000. When the bubble burst, its share price had plummeted to $8.60 by October 8, 2002. Last week, strong earnings boosted Cisco stock to $78—finally approaching its peak from 25 years ago. n nDiversification with a long-term perspective was a winning strategy in the wake of the dot-com bubble in the early 2000s, and we believe it will be a winning strategy if it turns out we’re in an AI bubble today. n nWall Street wrap n nSmall business optimism declines amid a weak labor market: Optimism among small businesses dropped for the second straight month, falling from 98.8 to 98.2 according to the latest data from the National Federation of Independent Business (NFIB). This number is still above the 52-year average of 98. n nA seasonally adjusted 32 percent of business owners reported job openings they could not fill in the current month, the same percentage as in the previous month. Before August, the last time unfilled job openings reached 32 percent was December 2020. Additionally, 27 percent of owners cited labor quality as their single most important problem. n n“Optimism among small businesses declined slightly in October as owners report[ed] lower sales and reduced profits,” said NFIB Chief Economist Bill Dunkelberg. “Additionally, many firms are still navigating a labor shortage and want to hire but are having difficulty doing so, with labor quality being the top issue for Main Street.” n nJust over a quarter of business owners (26 percent, seasonally adjusted) reported raising compensation in October, down from 31 percent in September. A seasonally adjusted 19 percent plan to raise compensation in the next three months. n nA net negative 13 percent (seasonally adjusted) of all owners reported higher nominal sales in the past three months, down seven points from September, while reports of positive profit trends fell nine points to -25 percent. Both figures are historically depressed. n nThe report showed some positive signs regarding inflation. The net percentage of owners raising average selling prices fell three points from September to a seasonally adjusted 21 percent, and a seasonally adjusted 30 percent plan to increase prices, down one point from September. Despite these declines, price increases remained above the monthly average of 13 percent, pointing toward the persistence of elevated inflation. n nThe week ahead n nWednesday: The Federal Reserve will release minutes from the October 29 Federal Open Market Committee (FOMC) meeting. We will be looking through the debate around the October rate cut for clues about what may unfold in December as FOMC members try to balance heightened inflation against growing signs that the labor market is weakening. n nNvidia will report earnings Wednesday as well. Investors will be parsing the AI juggernaut’s comments for clues about the likely direction of AI-related spending. n nThursday: The Bureau of Labor Statistics will release its delayed September jobs report. Investors will be looking for insight into the direction of the labor market after private indicators have shown the jobs picture weakening. The four government reports prior to September averaged just 27,000 net new jobs, with August at 22,000. n nFriday: Standard & Poor’s will release its preliminary Global U.S. Manufacturing and Services Purchasing Managers Index. Both were in expansion territory in October. That said, both manufacturing and service sector firms reported difficulties passing higher costs on to customers, due to subdued demand and intense competition, and business confidence last month for the year ahead neared its lowest levels in the past three years.