By Aoifinn Devitt, CFP® – Chief Investment Officer
Here in Chicago Thanksgiving was sunny but brisk. Now it is just very brisk. It is a reminder that winter – albeit delayed – comes around after all. The seasons cannot defy gravity forever. Can markets?
As we come to the end of November we have lurched from a textbook September Effect to a lackluster October to an ascendant November in what may turn out to be the best monthly performance in a year. Thanksgiving saw investors give thanks for four consecutive positive weeks in markets, and the strength was somewhat difficult to explain.
The euphoria kicked off with a confirmation of the Fed pause, signs of slackening inflation and indications that the elusive “soft landing” may have in fact have been pulled off. Rates fell as investors thought that the pause was here to stay and that the next move would be downwards, while equity markets again mopped up some of that excess cash on the sidelines and all things tech looked irresistible again. The consumer just continues to run and run – and Black Friday shopping seems to have broken new records, although, notably, the Affirm “buy now, pay later” facility saw 20% year on year increase in use.
After weeks of glorious color, the trees are bare now. Some wonder if this, the harshest of seasons, will expose other vulnerabilities too. Thinking again about the surge in “buy now, pay later” transactions – is this an indication of a consumer skating on thin ice – stretched in doing holiday shopping, stretched on making mortgage payments? Just as a segment of these consumers will now be forced back to making student loan repayments, the squeeze in rates and inflation will affect the most vulnerable of the consumer segments and it is the defaults at the margin that may stoke concern.
There is also some attention being paid to vulnerable corporates at this time. Companies that are leveraged and modelled to perfection don’t have much margin for error. It is of course the companies with the most borrowing, the least headroom and the most precarious customer bases that will be most exposed to persistently high rates. While not all debt has yet come due, it will eventually. The longer that interest rates stay high, the more exposed – and bare – these companies will appear. We expect the next few months to be a focus on these pockets of weakness – both among corporates and consumers – to see if anything sets off a chain reaction of sorts.
Other market players are feeling vulnerable too – the pundits who were chastened by markets’ surprising strength and were forced to hastily erase recession predictions and hard landing glide paths. There is a marked lack of conviction around today – no big bold predictions, and forecasts for 2024 are decidedly muted.
So as we race to year end we seem to be at an uneasy truce. As we write there is quite literally one of these in Gaza – or at least a ceasefire, and this brings some hope to a troubled geopolitical stage. Market forces seem to be in a truce too. So many contradictory and conflicting truths have existed at once this year – A strong employment picture, a resilient consumer, 22 year highs in mortgage rates, the steepest rate rise cycle since the 1980s and inflation that should be hurting more that it seems to. The disconnect has sparked volatility and fear at times – but not this month. We will watch to see if the goodwill lasts. After all, t’is the season.
Disclosures
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