Millennials, Rejoice! Mortgage Rates Drop Again

I want to bring in a Brian Seitel, Co chief investment officer, senior managing director and partner at the Bondson Group. It's great to have you on the show this morning. And with stocks near record highs, do you think this momentum can continue? Good to be with you. You know the momentum can continue. There's no reason why it can't. You know, we have positive earnings. We've got positive things going on in the economy. Yesterday we had both manufacturing and services PMI data that came out better than expected. And so really it's just a matter of how much of you know, the good news has been priced in at this point. And you know, can there, you know, how much farther can we really go at this point? But I I'd say the glass is half full here for the remainder of the year. What, if anything do you make of a 600 point drop in the Dow to Christmas point, worst day since March of last year? Do we dismiss it completely? Well, you can't dismiss anything completely, but honestly an intraday or one day move in markets is sort of hard to to draw a big conclusion from. I mean, like I said, most of the news yesterday, in fact all of it other than new home sales was, you know, quite positive. And so really what you're talking about is good news equaling bad news. And that's where the market went down because you know, people are looking at the Federal Reserve and maybe they won't move rates, you know, as quickly as as some considered they would. I think that is a bit surprising, Brian. And we've been talking about that with our various guests throughout the week as those Fed minutes indicate exactly what we've heard from some of these Fed officials that they do anticipate rates will be higher for longer. But in the past 10 days, we have seen softening in economic data across a variety of different measures. Do you think the Fed really can keep rates higher for longer? Well, I think I mean, at this point there's a 60% chance they're going to cut in September. And I think those odds are, are are pretty good. You know I can. Can they keep rates higher for longer? They can until they can't. I mean, right now the economic David may be weakening here and there, but overall we're still in expansion territory. And so they're trying to waiting for that inflation number to really come back towards that 2%, which I believe that we will get there. Just a matter of timing at this point. I do believe they want to cut rates. They already curtailed quantitative tightening at this point. So they're getting there. They're getting there. But you're right that, you know, we're, we're lasting longer here in the five handle range than we thought we would. Yeah, we've shifted from the emphasis on three cuts to now the potential for one. And maybe just in September. Is that where you land right now? You know, it's, it's hard to call economic data comes out every other week, every month. And so they're, they're data dependent. And so are we at the advancing group, you know that. So as of right now, I think that what is priced in is about what I suspect, which is they'll go in September, they'll take it from there, maybe we get one more before the end of the year and then into 25. What does it mean to you, Brian, that NVIDIA shares continue to rise? Even yesterday though, as we saw, the Dow, as we've been discussing, have its worst day in more than a year and the rest of the market falter, ending near session lows. Do we need to see this rally broaden out for broader health beyond just another record high from NVIDIA? We, we do. And, and actually you've, you've seen that in different sectors, obviously with the artificial intelligence, with the AI craze and boom, you know, some of this stuff is quite, quite honestly a little bit euphoric. That said, the earnings yesterday from NVIDIA are hard to sneeze at. You know, they're, they're, they were quite good. You're just dealing with the stock trading at 60 times current earnings and you know, 40 times forward earnings at this point. So the question just comes down to what are you really paying for it? You know how much has been priced in at this point. We tend to play in, in some other parts of the technology sector relative to AI that is more reasonably priced. Will the AI gains be broader than the obvious Microsoft Meta Alphabet? Will it spread be well beyond the the handful of stocks? Absolutely it will. And you know, there's plenty of different infrastructure and service providers to to to support AI that that we frankly own. But not only that, direct from, apart from a direct impact, you have multiple lines of businesses that are going to benefit just from the productivity gain they're going to get out of AI. So I understand why, you know, there's so much focus on it. It's in every boardroom, it's in every, you know, investor relations conversation at this point. So yes, I generally think it's a positive thing. I just think, you know, how far ahead is some of this this stuff actually gotten at this point? Interesting. So, Brian, as we do start to see mortgage rates drop in recent weeks, yields come back down a little as some of the economic data, broadly speaking, does soften and stock still seen winners and losers. What do you advise advising to clients and what adjustments are you making within your own portfolio to account for this environment? Yeah, that's the thing. So right now, you know, S&P 500 earnings expected for $24245 a share. That puts our multiple at 21 times earnings current. It puts us at 19 times forward earnings on the index. So I wouldn't own the index here. And what I would say to investors at this point is it's crucial and critical to be active and how you're you're picking stocks at this point and have, you know, management be able to select parts of the market that just aren't quite as overvalued as we head into the end of the year here. We tend to be dividend growth investors. And so we're capturing a high level of cash flow and income for our investors as we feel markets are pretty fairly priced at this point. And I think that's the way you need to play this. Interesting. So it is an election year and I've been talking to a lot of traders down here on the floor. What do you make sense of some of these mixed messages? Stocks like NVIDIA record highs, other stocks struggling, economic data starting to soften, yet the Fed still holding steady on higher rates for longer. And it's an election year, right? Because usually stocks do rise during an election year. And the traders down here think that stocks can continue to rise into the end of the year. Do you agree with that notion? I, I generally do, you know, there, there isn't a reason not to. Most of the data that we have now is, is like I said, is generally positive. We're at expansionary territory. You're right. It's an election year and so things can change. And I'm, I'm sure this particular election, things may change as far as how markets feel about things. But just remember, politics matter short term in markets. They do but but, but more or less on the margin, you know, we we do look at fundamentals, how earnings are going, where interest rates are, you know what the economy is telling us about where we think markets are trying to price in future expectations in the market. The election is a big deal and that'll change things. But for now I think that we're fairly positive. One piece of good news on a Friday is mortgage rates continue to slide third straight week they have fallen. They are now below 7 on the 30 year. Will that continue and what does it mean long term? I mean, you got to think if they're going to start cutting interest rates, that that should bode well for mortgage rates too. And so, you know, I, I do think those rates will, will tend to kind of pull down as far as most of the yield curve spectrum as rates start to decline more into a 2025 story. The housing market's been very resilient, but as I've written and spoken about many times, it just remains stuck. There's just not a lot of inventory. Rates are making it very tough for people to move. And so that's causing a lower amount of transactions to happen. It's a price discovery has just struggled here a little bit. I suspect when rates come down a little bit, that housing market may unfreeze a little bit. You may get a little better price discovery out of it. So what are we talking, you think rates below 5 is what we're going to need to unfreeze this housing market? I think towards 5 would start to get people to sort of move, you know, on, on things, you know, right now it's, it's just tough if you're locked in at a 3% interest rate for 30 years, even if you want to upsize or move to another location, it's stuff to, to stomach a, you know, 100% increase in your interest rate. I think if we can get towards 5%, still have tax deductibility, you'll see some, some unfreezing housing. So I do want to get your take, Brian, in terms of a hard landing or a soft landing. You still think we're in an expansionary economic cycle. And I think many people do agree with you. But as we come out of that, do you think a recession is a possibility based on the latest figures? Recessions are inevitable. You know, as far as the latest figures, that's not what we're looking at. They're they're not pointing to recession that is imminent right now. But, you know, whether, you know, whether we get one, I think is just a matter of when, not if. Do I think it's a 2024 story? I don't, I think it's a 25I personally don't either. But, you know, that's looking out here now 18 months. And so beyond that, I think is just sort of flipping the coin on on how things will change. All right. Brian Seitel, Co Chief Investment Officer, Senior Managing Director and Partner at the Boston Group. Thank you.

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