The S&P 500 could see a setback in the next 12 months as the bull market enters its third year: CFRA Research
U.S. stocks were kicking off their third year in the bull market with the S&P 500 scoring a fresh record on Monday — but history suggests investors need to be prepared for a potential setback in the coming 12 months.
Since 1947, all 11 bull markets that celebrated their second birthday experienced at least one decline of 5% or more in the subsequent 12 months, with some even turning into new bear markets, according to Sam Stovall, chief investment strategist at CFRA Research.
“The average return following the 11 bull markets [since 1947] that celebrated their second birthday was a mere 2%,” Stovall said in a Monday client note. “What’s more, all of them experienced a decline of 5% [in the next 12 months], while five endured selloffs in excess of 10% but less than 20%, and three succumbed to new bear markets.”
The S&P 500 has climbed nearly 64% since Oct. 12, 2022, when the large-cap benchmark index hit a bear-market closing low of 3,577.03. The index surged 0.8% on Monday to finish at 5,859.85, according to FactSet data.
The table below shows the first year of the current bull market saw a 22% advance for the S&P 500, which was the third lowest since 1947. However, the index posted the highest of all second-year increases of 34%, versus the median of 11.5%, according to CFRA Research.
In Stovall’s view, the current high valuation of the U.S. stock market, especially large-cap stocks, is “concerning” as the bull market enters its third year.
The trailing price-to-earnings ratio for the S&P 500 is currently 25 — the highest valuation for the second year of a bull market since World War II. That level is also 48% higher than the median second-year P/E for all bull markets since 1947, according to CFRA Research.
“P/E multiples typically shrank during the third year of the bull market, since earnings-per-share growth tended to accelerate and confirm the optimism implicit in the sharp price advances during the early years of bull markets,” Stovall noted.
To be sure, Wall Street analysts are expecting year-over-year earnings growth rates of 14.2%, 13.9% and 13.1% for the fourth quarter of 2024 and the first and the second quarters of 2025, respectively, according to John Butters, senior earnings analyst at FactSet Research.
Earnings are also expected to grow around 15% in fiscal-year 2025, compared with an expected growth rate of around 10% in 2024, Butters said in a Friday note.
U.S. stocks ended higher on Monday as investors turned their attention to the next batch of corporate earnings. The Dow Jones Industrial Average was up over 200 points, or 0.5%, while the Nasdaq Composite rose 0.9%, according to FactSet data.
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JPMorgan Chase CEO Jamie Dimon kicked off third-quarter earnings season Friday with a stern warning about geopolitical threats that could hurt the global economy. “Recent events show that conditions are treacherous and getting worse,” he wrote in a press release.
“There is significant human suffering, and the outcome of these situations could have far-reaching effects on both short-term economic outcomes and more importantly on the course of history,” he said, referring to war in Ukraine and Israel’s war against Hamas and Hezbollah.
Dimon noted that inflation is slowing and the US economy has avoided recession but that “several critical issues remain, including large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization of the world.”
The world’s largest bank beat analysts’ expectations last quarter, even as its profit fell 2% from a year earlier.
Shares of JPMorgan (JPM) jumped about 4.5% in morning trading and are 30% higher so far this year.
Global woes
Dimon has been sounding the alarm on geopolitical instability for over a year, repeatedly calling it the largest threat to the global economy and saying that the world order established at the conclusion of World War II is under attack.
Last month, Dimon said that these worries dwarf all others. “Iran, North Korea and Russia, I think you can legitimately call them (an) evil axis,” he said at September’s Financial Markets Quality Conference in Washington, referring to the term first used by George W. Bush in 2002 to describe Ba’athist Iraq, Iran and North Korea.
Dimon’s reimagining of the axis is “working every day to make it worse for the Western world and for America,” he said.
The economy, hurricanes and the Fed
Dimon also expressed some uncertainty about his outlook for the US economy but said that overall it remained resilient.
JPMorgan Chase CFO Jeremy Barnum echoed Dimon’s feelings on an earnings call Friday morning, citing the strength of consumer spending. “We see spending patterns as being solid and consistent with the narrative that the consumer is on solid footing and with a strong labor market,” he said.
Those patterns support the case for a “no landing scenario,” he added, referring to when the economy avoids both a recession and a sharp slowdown, continuing to grow steadily despite higher interest rates.
Still, US federal debt surpassed $35 trillion this year and has been a major point of concern for Dimon. He’s repeatedly warned that rising government debt could stoke inflation and complicate the Federal Reserve’s ability to manage the economy.
While the Fed has become more optimistic, cutting its inflation forecast for this year and next, Dimon isn’t convinced that price pressures will ease so quickly.
“I wouldn’t count my eggs,” he said last month, noting that he only sees a 35% to 40% chance of the economy avoiding recession.
Dimon also acknowledged on Friday the human toll that hurricanes Milton and Helene have taken in the US but minimized the impact they’ll have on the economy.
“First and foremost, our hearts go out to all those people affected and the families who lost lives. We’re also helping our employees and customers, to do everything we can to be prepared at the state level,” he told CNN on a press call. But, he said, the hurricanes likely wouldn’t have large and lasting consequences for the economy.
“Hurricanes have never had a traumatic effect on the global economy,” he said.
Elections and Dimon’s legacy
Friday was JPMorgan’s final earnings call before the upcoming US presidential election on November 5, and Dimon steered clear of wading into political waters, emphasizing that he wouldn’t be endorsing any candidate and didn’t want to comment on the election. His reluctance followed a social media post from former President Donald Trump last week claiming Dimon had endorsed him — a statement that JPMorgan quickly denied.
Dimon also addressed whether or not he would consider taking a government position under the next administration. “I think the chance is almost nil… I love what I do. I intend to be doing what I do. I almost guarantee I’ll be doing this for a long period of time, or at least until the board kicks me out,” he said during Friday’s earnings call.
Credit problems
While JPMorgan beat analysts’ expectations on its earnings on Friday, the bank also reported it set aside $1 billion more in reserves to cover growing losses from unpaid loans.
In the third quarter, the bank set aside $3.1 billion to cover potential loan losses — more than twice as much as last year — mainly due to a 40% rise in unpaid loans, especially in its credit card division.
Despite some signs of an improving economy, JPMorgan said it added to its reserves due to higher card balances and economic uncertainty, which contributed to a 2% drop in quarterly net income to $12.9 billion.
“Cash is a very valuable asset in a turbulent world,” said Dimon on Friday. “You see my friend Warren Buffett stockpiling cash right now. I mean, people should be a little more thoughtful about how we’re trying to navigate in this world and grow for the long term for our company.”
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Homeowners in California were the most active in taking out home-equity loans
Homeowners across the U.S. may be locked in, but they can still cash out.
With home values soaring over the last few years, homeowners who have built up equity are turning to home-equity loans to cash in on their gains.
In the first half of this year, home-equity lending has soared to the highest level since 2008, real-estate data-analytics firm CoreLogic said in a report released Wednesday.
Over that period, lenders originated more than 333,000 new home-equity loans totaling about $23.6 billion, the company said.
Home-equity loan versus HELOC
Home-equity loans are different from home-equity lines of credit, or HELOCs.
When a homeowner takes out a home-equity loan, they get a lump sum up front, have a rate that is fixed and make payments on a schedule until the loan is paid off.
A HELOC, on the other hand, is a type of revolving credit that allows a homeowner to borrow against the equity in their home. Borrowers can spend up to their credit limit during the draw period, which can be up to 10 years, after which they enter a repayment period, according to the Consumer Financial Protection Bureau. Rates on HELOCs are variable and are tied to Federal Reserve policy rates.
The average interest rate on a home-equity loan was 8.36% as of Oct. 9, according to Bankrate, while the average HELOC interest rate was 8.73%.
HELOC activity surged in the first half of 2022, but that demand has since waned.
Over the first half of 2024, lenders originated 671,00 new HELOCs totaling about $105 billion, CoreLogic said, which was down from the same period last year.
Why homeowners are raiding their homes for cash
Homeowners are tapping into their home equity to cover expenses such as home renovations or to consolidate debt. They’re taking on a second mortgage rather than refinancing because they want to avoid giving up the relatively low rate on their primary mortgage.
Nearly nine in 10 homeowners with a mortgage have a rate below 6%, many of them far lower than the prevailing 30-year rate of 6.67% reported by Mortgage News Daily on Thursday morning. That has created a persistent lock-in effect that has put a damper on home-sales activity.
With the housing market likely to remain frozen for the time being, and “given prolonged high home prices, some owners are likely to continue to tap accrued home equity for necessities such as home renovations or settling higher-interest-rate debts,” CoreLogic added.
Homeowners in California were the most active in terms of home-equity lending activity.
The four metropolitan areas with the most home-equity loans in the first half of 2024 were all in California: Los Angeles-Long Beach-Glendale, Anaheim-Santa Ana-Irvine, San Diego-Chula Vista-Carlsbad and Riverside-San Bernardino-Ontario.
The average California homeowner gained approximately $55,000 in equity over the past year, CoreLogic noted.
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US consumer sentiment unexpectedly fell for the first time in three months as lingering frustration with a high cost of living offset more sanguine views of the job market.
The preliminary October sentiment index declined to 68.9 from 70.1 in September, according to the University of Michigan. The median estimate in a Bloomberg survey of economists called for a reading of 71.
Consumers expect prices will climb 2.9% over the next year, up from the 2.7% expected in September and the first increase in five months, the report issued Friday showed. At the same time, they see costs rising 3% over the next five to 10 years, down from 3.1% in the prior month.
While the rate of inflation has cooled over the past year, households remain troubled by high prices that they also see outpacing their income gains in the year ahead. A measure of consumers’ perception of their current financial situation dropped to the lowest level since the end of 2022.
The share of consumers who expect unemployment to rise in the coming year fell to 31%, the lowest reading in 10 months.
“Despite strong labor markets, high prices and inflation remain at the top of consumers’ minds,” Joanne Hsu, director of the survey, said in a statement.
Separate figures Friday showed no change in a gauge of prices paid to producers in September, suggesting further progress toward tamer inflation.
Still, respondents welcomed the Federal Reserve’s decision last month to start lowering borrowing costs. Their views of buying conditions for durable goods such as cars and major appliances edged up to a four-month high.
Looking at homebuying conditions, concerns about high interest rates fell to the lowest in 15 months. But a majority still sees borrowing costs as too high, suggesting further easing is necessary for bolster sales, the report said.
The current conditions gauge slipped to 62.7 from 63.3. A measure of expectations fell to 72.9 this month from 74.4 in September.
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The rivalry to dominate in AI, quantum computing and other technologies of the future may even intensify after November’s election
The presidential race between Donald Trump and Kamala Harris comes at a time of rising geopolitical tensions on multiple fronts. In the first of an in-depth series, Jane Cai takes a look at what lies ahead for the hi-tech rivalry between China and the US.
Washington and Beijing’s hi-tech rivalry is expected to continue and even intensify, regardless of who wins the US presidential election, according to analysts who say the tone for further strained US-China relations has already been set.
Former president Donald Trump’s boast that he took “billions and billions of dollars” from China through tariffs on a wide variety of Chinese imports, including hi-tech products, suggest that higher duties could be on the way if he wins the White House.
Meanwhile, Vice-President Kamala Harris has promised to make sure “that America – not China – wins the competition for the 21st century and that we strengthen, not abdicate, our global leadership”.
The approaches of the candidates may differ but the tech competition between China and the US will continue to weigh heavily on the international economic and geopolitical landscape, analysts said.
“Breakthroughs in science and technology will be central to the geopolitical landscape of the 21st century and to efforts by the US and China to dominate it,” said Sourabh Gupta, a senior policy specialist with the Institute for China-America Studies in Washington.
“To be clear, there is no ‘new cold war’ that is about to break out as yet in US-China relations [of] the sort of overarching zero-sum rivalry that played out between Washington and Moscow during the second half of the 20th century,” Gupta said.
“However, there is a palpable cold war-style, zero-sum equation settling into their competition to dominate the high-technology and advanced manufacturing industries of tomorrow.”
The US has been tightening its grip on technology transfers with China for years, denying market access to Chinese tech products and cracking down on technology-related investments in both directions.
Telecoms equipment giants Huawei and ZTE were banned from the US during the Trump administration because of alleged links to the Chinese government and military.
Sales of advanced chips and chip-making equipment to China by the US and its allies have also been banned on national security grounds.
Chinese President Xi Jinping has repeatedly emphasised the importance of technological self-reliance and the development of home-grown industries of the future, including AI and quantum computing, to keep China in the global tech race.
Analysts expect Harris to stick with President Joe Biden’s “small yard, high fence” approach to China if she wins in November. The strategy puts strict restrictions on a few military-related technologies while maintaining normal economic exchanges in other areas.
But the same semiconductors that are subject to export controls because of their use in advanced artificial intelligence models, weapons and surveillance systems are also used in autonomous vehicles, 5G-connected phones, and commercial applications of AI.
The Biden administration has also barred hundreds of Chinese companies from importing almost all US-origin products from the US and its allies and introduced inbound and outbound investment screening if tech firms are involved.
Harris is also expected to raise the fencing over computing-related technologies, biotech and clean tech – areas singled out by the Biden administration as a “national security imperative” for the US to hold its leadership position.
The US House of Representatives passed 25 laws in just one week of September, in a largely bipartisan push to limit China’s influence by restricting access to China-linked biotech companies, China-made drones and even Chinese electric vehicle components.
Wu Hailong, president of the semi-official China Public Diplomacy Association, warned that the “anti-China bills could potentially push the Sino-US relationship into a dangerous position once again”.
The latest bills follow the Chips and Science Act, enacted in August 2022, that set aside US$53 billion to fund American semiconductor production and research and was hailed by the White House for “protecting national security” as well as “bringing semiconductor supply chains home”.
According to Pang Zhongying, chair professor in international political economy at Sichuan University in Chengdu, “there is already a complete set of rules and regulations to curb China’s technological development”.
“If Harris is elected, policy continuity will be the main theme, though she may show her own preference later, if she has a second term,” he said.
If Trump is returned to the presidency, he is likely to tilt towards a “smaller government”, reduce industry subsidies and resort to trade tariffs again as a bargaining tool, Pang said.
Trump has recently called for up to 20 per cent tariffs on all imports and 60 per cent on Chinese goods, prompting many experts to predict that a second Trump presidency would be more confrontational towards Beijing.
In 2018 and 2019, the Trump administration imposed four rounds of tariffs on about two-thirds of US imports from China, after an investigation found China’s practices related to technology transfer, intellectual property and innovation were “unreasonable or discriminatory and burdened or restricted US commerce”.
“The silver lining [for China] may be Trump’s attitude towards American allies. After all, not all companies in other countries are willing to abandon the massive market of China,” Pang said.
The Biden administration has been pressing US allies – including the Netherlands, Germany, South Korea and Japan – to tighten restrictions on China’s access to semiconductor technology.
However, Trump, an “America First” advocate, is dubious about alliances and has been a vocal critic of world organisations such as Nato.
There are also concerns in Europe that a victory for Trump in November could mean a decline in US aid to Ukraine.
Mei Xinyu, a researcher at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, said that while their approaches may vary, both candidates intend to press ahead with technology curbs on China.
According to Mei, the confrontation is likely to reach a peak during the next US president’s four-year tenure.
“During that period, China’s focus will be on technological development. It will spare no effort to innovate and industrialise innovation results as soon as possible by taking advantage of its economic scale.”
Beijing has pumped nearly 690 billion yuan (US$97 billion) into the chip industry since 2014, in its bid to be able to mass produce its own advanced chips, and is also pursuing a bigger say in global AI governance.
China has also doubled down on its efforts to persuade the many leading Chinese scientists overseas to return home and train domestic talent in the emerging hi-tech industries.
In June, Xi wrote to world-renowned computer scientist and AI expert Andrew Yao Chi-Chih, the only Chinese winner of the AM Turing Award, to praise his decision to leave the US two decades ago to teach at Tsinghua University.
Xi urged Yao – who heads the university’s Institute for Interdisciplinary Information Sciences and the new College of Artificial Intelligence – to continue helping China achieve self-reliance and become an educational, scientific and technological powerhouse.
According to Richard Suttmeier, a University of Oregon researcher looking at science and technology in the context of US-China relations, “in many ways, the current situation is one of lose-lose for both countries”.
“China’s commitment to high levels of self-reliance in science and technology development, in spite of numerous international ties, puts it somewhat at odds with global trends,” he said.
“US efforts to build a network of cooperation in science and technology among democracies will have some national and international benefits in the shorter run, but as a strategy that attempts to isolate China’s emergence as a science and technology superpower, is likely to run into big problems over the longer run.”
Six of the top 10 rising institutions in artificial intelligence between 2019 and 2023 were in China, but they remained relatively decoupled from US-led global collaboration networks, according to the latest Nature Index.
The AI index, compiled by part of the group that owns the British journal Nature, found that China’s global connectivity is lagging behind the US – the leading AI research nation – as well as Britain and Germany.
According to Michael Frank, chief executive and founder of business intelligence platform Seldon Strategies, the US-China relationship has settled into a new equilibrium that will persist for a long time.
“Tactics may change, but the US strategy of limiting technology transfer to China, and the Chinese strategy of achieving technological self-sufficiency, are fixed,” he said.
“Many countries are wary of being forced to choose between the US and China. Even if the competitors don’t make those demands explicitly, global companies will have to make a decision between which ecosystem to prioritise.”
Read the full article HERE.
The pace of price increases over the past year was higher than forecast in September while jobless claims posted an unexpected jump following Hurricane Helene and the Boeing strike, the Labor Department reported Thursday.
The consumer price index, a broad gauge measuring the costs of goods and services across the U.S. economy, increased a seasonally adjusted 0.2% for the month, putting the annual inflation rate at 2.4%. Both readings were 0.1 percentage point above the Dow Jones consensus.
The annual inflation rate was 0.1 percentage point lower than August and is the lowest since February 2021.
Excluding food and energy, core prices increased 0.3% on the month, putting the annual rate at 3.3%. Both core readings also were 0.1 percentage point above forecast.
Much of the inflation increase — more than three-quarter of the move higher — came from a 0.4% jump in food prices and a 0.2% gain in shelter costs, the Bureau of Labor Statistics said in the release. That offset a 1.9% fall in energy prices.
Other items contributing to the gain included a 0.3% increase in used vehicle costs and a 0.2% rise in new vehicles. Medical care services were up 0.7% and apparel prices surged 1.1%.
Stock market futures moved lower following the report while Treasury yields were mixed.
The release comes as the Federal Reserve has begun to lower benchmark interest rates. After a half percentage point reduction in September, the central bank is expected to continue cutting, though the pace and degree remain in question.
Fed officials have become more confident that inflation is easing back toward their 2% goal while expressing some concern over the state of the labor market.
While the CPI is not the Fed’s official inflation barometer, it is part of the dashboard central bank policymakers use when making decisions. Several of its key components filter directly into the Fed’s key personal consumption expenditures price index.
Though the inflation reading was higher than expected, traders in futures markets increased their bets that the Fed would lower rates by a quarter percentage point at their Nov. 6-7 policy meeting, to about 86%, according to the CME Group’s FedWatch gauge.
In recent days, policymakers have said they see rising risks in the labor market, and another data point Thursday helped buttress that point.
Initial filings for unemployment benefits took an unexpected turn higher, hitting as seasonally adjusted 258,000 for the week ended Oct. 5. That was the highest total since Aug. 5, 2023, a gain of 33,000 from the previous week and well above the forecast for 230,000.
Continuing claims, which run a week behind, rose to 1.861 million, a rise of 42,000.
The jobless claims figures follow the damage from Hurricane Helene, which struck Sept. 26 and impacted a large swath of the Southeast. Florida and North Carolina, two of the hardest-hit states, posted a combined increase of 12,376, according to unadjusted data.
A strike by 33,000 Boeing workers also could be hitting the numbers. Michigan had the largest gain in claims, up 9,490 on the week.
On the inflation side, rising prices across a variety of food categories showed that it is proving sticky.
Egg prices leaped 8.4% higher, putting the 12-month unadjusted gain at 39.6%. Butter was up 2.8% on the month and 7.8% from a year ago.
However, shelter costs, which have held higher than Fed officials anticipated this year, were up 4.9% year over year, a step down that could indicate an easing of broader price pressures ahead. The category makes up more than one-third of the total weighting in calculating the CPI.
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Rare GOP advantage takes pressure off Trump to win over independent voters
Beneath the headline results in many polls, something unusual has turned up with big implications for politics: More voters are calling themselves Republicans than Democrats, suggesting that the GOP has its first durable lead in party identification in more than three decades.
The development gives former President Donald Trump an important structural advantage in the November election. But other factors could prove more important to the outcome. Democratic Vice President Kamala Harris still leads narrowly in many polls, in some cases because she does well with independent voters.
Bill McInturff, a GOP pollster who works on NBC News surveys, first noticed in May that more voters were calling themselves Republicans. “Wow, the biggest deal in polling is when lines cross, and for the first time in decades, Republicans now have the national edge on party ID,” he wrote. He called the development “the underrecognized game-changer for 2024.”
In combined NBC polls this year, Republicans lead by 2 percentage points over Democrats, 42% to 40%, when voters were asked which party they identified with. That compares with Democratic leads of 6 points in 2020, 7 points in 2016 and 9 points in 2012.
“Republicans being 5 to 9 points down on party identification—that is like running uphill,” McInturff said. “We don’t know the election’s outcome, but we know Republicans have a better shot at doing well if party ID is functionally tied, with perhaps the smallest tilt toward Republicans.”
Gallup also found more voters identifying as Republican than Democratic, by 3 points in its July-to-September surveys. It was the first time that the GOP had an advantage in the third quarter before a presidential election in Gallup surveys dating to 1992.
Pew Research Center found the GOP with a 1-point lead this spring in an extensive, 5,600-person poll it conducted to create benchmarks for its other surveys. As with Gallup and NBC polls, each party’s share of voters included people who call themselves independents but also say they consistently lean toward one party.
The last time that presidential Election Day exit polls found Republicans on a level playing field with Democrats in party identification was in 2004, when the two were tied. That was also the only year in about three decades that Republicans won the national popular vote.
“It’s definitely unusual,” Jeffrey Jones, senior editor of Gallup polling, said of the GOP advantage. Gallup said party affiliation is one of several foundational factors favoring the GOP this year, along with its finding that Republicans are trusted more to handle the economy and immigration, which voters see as the nation’s most challenging problems.
Not all polls find the same tilt toward the GOP, and a lead in party affiliation isn’t a guarantee of success. In the 2022 midterm elections, Republicans turned out more voters than Democrats did in Pennsylvania, Arizona and Michigan, according to the AP VoteCast survey of the electorate. But independent voters favored Democrats so heavily that the party won the governor’s races in all three states, as well as Senate races in Pennsylvania and Arizona. Democrats also benefited from an erosion of support among Republican voters for many GOP candidates who aligned themselves closely with Trump.
More recently, NBC’s September poll found Republicans with a 1-point advantage on party identification, and yet Harris led Trump by 5 points. Her lead rested on an advantage among independent voters and that she was winning more than 20% support among Republicans who don’t consider themselves part of Trump’s “Make America Great Again” movement, a group that ultimately could shift back to Trump.
Similarly, a New York Times/Siena survey released this week found Republicans outnumbering Democrats among likely voters by 1 percentage point, but Harris leading Trump by 3 percentage points. Defections from Trump among some GOP voters was one reason for her lead.
Patrick Ruffini, a Republican pollster, said the GOP advantage in party identification lessens the pressure on Trump to win over independent or swing voters, “but it does not say that Trump is going to win” this year.
“It’s a loose indicator that you have a number of people who are disappointed in the Democratic Party’s performance,” Ruffini said. “It should be a good indicator for Trump. But as we saw in 2022, it doesn’t mean the candidates who are running are going to maximize their advantage.”
Jones said party identification tends to rise and fall in tandem with views of the president. In combining all its surveys in a given year, Gallup has found the GOP leading in party identification only three times since 1991. That was in 1991, after President George H.W. Bush led allies in the first Gulf War, and in 2022 and 2023, as President Biden’s job approval ratings sank.
The GOP has held a short-term edge on occasion, such as after the Sept. 11, 2001, terrorist attacks, when voters rallied behind President George W. Bush. But the advantage soon faded.
Party identification in polling gives a snapshot of voters’ current thinking about the two parties, and it can be a different picture than the one drawn by voter-registration data. Many analysts said more voters nationwide are registered as Democrats than as Republicans, though the numbers include some estimates because many states don’t record a party affiliation when people register to vote.
L2, a nonpartisan company that collects and updates the voter lists from each state, said more than 38% of U.S. voters are Democrats and 32% are Republicans, based on state records and its modeled calculation of voter preferences in states that don’t register voters by party.
Election results show that some of those Democrats have been voting Republican for years in states such as Pennsylvania, and that some with GOP registration back Democrats. They just haven’t updated their voter-registration records.
Read the full article HERE.
Interest payments on the existing national debt cost more than the Pentagon’s budget in the last fiscal year, the Congressional Budget Office reported.
The federal budget deficit swelled to $1.8 trillion in the fiscal year that ended in September, an enormous sum that significantly increases the national debt as Washington barrels toward a potential 2025 showdown over spending and taxes.
The Congressional Budget Office warned in a Tuesday report that interest payments on the debt reached $950 billion, larger than the Pentagon budget.
The next president is likely to face key decisions, along with Congress, about whether and how to tackle the debt and skyrocketing interest costs. Neither former president Donald Trump nor Vice President Kamala Harris has made deficit reduction a key plank of their campaigns for the White House.
As of Friday, the United States had accumulated a public debt of $35.7 trillion. The CBO projected in June that the debt would exceed $50 trillion by the end of this decade. The nation’s debt compared with the size of the overall economy, a key metric of fiscal stability, is projected to exceed its all-time high of 106 percent by 2027.
“A [nearly] $2 trillion deficit is bad news during a recession and war, but completely unprecedented during peace and prosperity,” said Brian Riedl, a senior fellow at the conservative-leaning Manhattan Institute. “The danger is the deficit will only get bigger over the next decade due to retiring baby boomers and interest on the debt.”
While the debt receded as a political issue as the nation spent big to combat the coronavirus pandemic, that is likely to change in the coming year, when major portions of Trump’s 2017 tax cut law expire. Without new legislation, millions of Americans would see a sharp tax increase. But extending the cuts is likely to necessitate massive new borrowing.
Meanwhile, Social Security and Medicare are projected to run out of money in 2035 and 2036, respectively, forcing sharp reductions in benefits without action from lawmakers. And rising interest rates on the debt risk crowding out spending on other vital needs.
The two presidential candidates — and congressional leaders — have far different approaches to handling the country’s finances.
Trump has proposed programs or tax policies that could increase the debt by as much as $15.2 trillion or as little as $1.45 trillion through 2035, according to a nonpartisan estimate released Monday by the Committee for a Responsible Federal Budget (CRFB), a top Washington fiscal watchdog.
He’s proposed massive tariffs on imports that could raise as much as $4.3 trillion over 10 years but would also probably spike consumer inflation and depress economic growth, according to even some of his own economic advisers.
Stephen Moore, an economist at the conservative Heritage Foundation and a Trump economic counselor, has said the former president prioritizes economic growth over spending cuts, reasoning that a growing economy would produce enough tax revenue to outpace inflation.
Trump’s campaign did not respond to a request for comment. Earlier this week, Trump senior adviser Brian Hughes said in a statement that the former president’s plan to control the deficit would “rein in wasteful spending, defeat inflation, reduce the burden of interest costs, and ignite economic growth that fuels federal revenue, so we can make our economy great again.”
But Trump’s plans, and his campaign’s focus on gross domestic product growth, are far from enough to reduce annual deficits, even if the U.S. economy expands well beyond most forecasts.
“You cannot grow your way out of this problem,” said Doug Holtz-Eakin, president of the right-leaning American Action Forum and a former CBO director. “They are arithmetically in the wrong place.”
Harris’s proposals, the CRFB projected, could carry a maximum price tag of $8.1 trillion, or they could be fully paid for with new revenue from targeted tax increases on the wealthiest earners and major corporations, and higher tax rates on capital income.
Harris has pledged to extend the 2017 tax cuts for those making less than $400,000 a year and said earners in the top tax bracket would pay a 39.6 percent rate. But she has not proposed specific new tax rates for filers in between those ranges, making it difficult to assess the budgetary impact of that policy.
A Harris campaign spokesperson said in a statement that Harris as president would commit to reducing the deficit in her budgets.
“One of the things that I’m going to make sure is that the richest among us, who can afford it, pay their fair share in taxes,” Harris said in a “60 Minutes” interview broadcast Monday, when asked about paying for her proposals. “It is not right that teachers and nurses and firefighters are paying a higher tax rate than billionaires and the biggest corporations. And I plan on making that fair.”
A White House spokesman said Republican tax plans would worsen the fiscal crunch.
“While the deficit is lower than it was last year, President Biden believes we need to reduce the deficit further by making the wealthy and large corporations pay their fair share, and by reducing wasteful spending on special interests like Big Pharma,” spokesman Jeremy Edwards said.
Many Democrats say tax cuts — dating to legislation under President George W. Bush in 2001 — have taken too big a bite out of federal revenue, especially in recent years. And the memory of past congressional fiscal battles is haunting some liberal lawmakers. Sen. Elizabeth Warren (D-Mass.) this spring warned Democrats against taking “the coward’s way out” by not raising taxes enough on the wealthy and corporations in the coming tax debate.
“Over the last two decades, we are dealing with the ramifications of about $10 trillion of missing revenue. We’ve had four rounds of massive tax cuts, mostly skewed to the wealthy, none of which were paid for,” Rep. Brendan Boyle (Pa.), the top Democrat on the House Budget Committee, told The Washington Post. “As we get ready for the big once-in-a-decade fight that’s going to happen in 2025 over what tax policy will look like for the next eight to 10 years, we need to be serious about ensuring that we have the proper revenues in order to pay for the size of government we want and the American people expect.”
But the tenor of the presidential campaign has set many budget watchdogs on edge, as both candidates put forward ever-larger spending proposals and embrace extending at least some of the 2017 tax cuts.
After Trump’s running mate, Sen. JD Vance (Ohio), proposed a $5,000 child tax credit — a policy Trump himself has not endorsed — Harris countered with a $6,000 tax credit proposal for parents with newborns. Both candidates have embraced ending taxes on tips: Trump would exempt tipped wages from all taxes; Harris would exempt them only from income taxes and has discussed other policy guardrails.
“It’s a patchwork of targeted fiscal bribes, and it in no way adds up to an overall economic vision, which is really needed at a moment when our economy is changing dramatically,” CRFB President Maya MacGuineas said.
A larger debt burden — fueled by growing annual deficits — could prevent lawmakers from appropriately responding to those changes, experts and policymakers worry.
As the United States is forced to spend more money paying back its lenders, it has less to fund new investments and vital services.
“Debt service is nonnegotiable, so you’ve got to pay that, and you can’t use those funds for any other budgetary priorities,” Holtz-Eakin said.
Precious metals hold a unique place in the investment universe. Gold, silver, platinum and palladium combine aspects of financial instruments with characteristics of raw materials used in manufacturing.
Investors often hold relatively small amounts of precious metals when they’re worried about currency devaluation amid government spending or high inflation during economic boom times. Precious metals, especially gold, also have an allure as a place to park cash during times of heightened global economic or political worries.
“The timeless element of precious metals has led investors to perceive them as safe havens, inflation hedges and wealth diversifiers,” said Rohan Reddy, director of research with investment management firm Global X. “Historically, this has made them useful hedging instruments during market downturns as well as times of geopolitical uncertainty.”
Understanding investing in precious metals
The first thing to understand about precious metals is that they’re not all created equal.
While these metals can serve as portfolio diversifiers or hedges against inflation or weakness in the US dollar, they all have different demand dynamics.
“Investors should seek to understand the driving factors behind each precious metal, as each can behave differently under a variety of circumstances,” Reddy said.
Types of precious metals
The main precious metals for the investment community are gold, silver, platinum and palladium.
1. Gold
Of the four main precious metals, gold is the most popular for pure investment considerations, but the biggest source of its demand is for the jewelry market, especially in India and China.
“Gold is the preferred hedge against geopolitical tensions around the world, inflation and economic uncertainty,” said Alex Ebkarian, chief operating officer of physical precious metals dealer Allegiance Gold. “While it has periods of volatility, it has clearly proven to be a great long-term investment and will continue to be so for the foreseeable future. Overall, gold tends to carry less risk than the other three metals.”
That’s in part due to gold having a much larger market than silver, platinum or palladium, meaning investment in the “yellow metal” may be more liquid — easier to buy and sell — than metals with smaller markets.
2. Silver
Silver is often called “the poor man’s gold” because it is much cheaper than the yellow metal and often moves along with gold based on similar investment considerations.
But silver has long been more widely used as an industrial metal in electronics, automobiles and appliances, and the demand outlook amid the energy transition is bright because of its heavy use in solar panels.
That industrial demand also makes silver a hedge against inflation. When the economy is gaining ground, or expected to, silver prices might rise, giving investors a cushion against rising consumer prices for goods and services.
3. Platinum
Platinum is rarer than gold and has a smaller market, and the limited supply makes the metal subject to volatile price swings, Reddy said. With most global platinum coming from South Africa, problems in the mining industry there — such as struggles with electricity — can exacerbate the volatility.
Demand for platinum is largely dominated by jewelers and industrial buyers, especially the auto industry, which uses the metal in catalytic converters.
4. Palladium
Palladium is also a key ingredient for catalytic converters, making demand for it highly influenced by the automotive sector.
Due to its rarity, palladium is often extracted along with other metals, which can make it difficult to get pure-play palladium exposure from mining companies, Reddy said.
Benefits and drawbacks of investing in precious metals
Volatility
Like other commodities, precious metals prices are often volatile.
Diversification
But George Cheveley, metals and mining specialist with investment manager Ninety One, pointed out that precious metals also often perform well when equities are falling, providing portfolio diversification.
Robert Johnson, a finance professor at Creighton University, agreed that precious metals are good portfolio diversifiers. He studied the relationship between precious metals, equities and fixed-income investments for a book he co-authored called “Invest with the Fed: Maximizing Portfolio Performance by Following Federal Reserve Policy.”
“What we found is that the correlation between the returns to precious metals and stock and bond indices was near zero,” Johnson said. “So, while the returns to precious metals historically have been lower than those of stock market indices, the low correlation between stocks and precious metals makes them ideal diversifiers in a portfolio context.”
Economic sensitivity
A key risk to the diversification aspects of silver, platinum and palladium, however, is their increased links to economic cycles because of their industrial uses. That could mean these metals underperform gold in an economic downturn as investors flock to the perceived safety of the yellow metal.
Options for investing in precious metals
Investing vehicles for precious metals have proliferated in recent years, but retail investors just dipping their toes in the water will probably want to consider three relatively straightforward methods — buying bars or coins, shares in mining companies or funds that invest in mining companies or that are backed by physical metals.
1. Buying bars or coins
Investors can buy all four of the aforementioned precious metals in the form of bars or coins, also known as bullion.
While bullion provides the most tangible way to invest in precious metals, there are downsides. Storage, transportation and insurance costs all dampen price appreciation, which is the only way to make money with bars and coins because they don’t pay interest or dividends.
Investors will also pay a premium over the value of the physical weight of the metal in bullion form.
2. Buying shares in mining companies
Buying stocks of mining companies in a brokerage account is as easy as buying shares in any other type of company.
You’ll want to pay attention to whether the miner is a smaller company that’s exploring or developing a mine, known as a junior miner, versus a larger enterprise that already has a mine or multiple mines in operation.
The former provides huge returns but comes with more risk, while the latter offers more stability, cash flow and the potential for dividends.
Miners that produce precious metals can outperform when prices rise because their costs are relatively fixed, and higher prices increase their profit margin. They can also sometimes ramp up production to take advantage of higher prices.
However, mining is a risky business, even for established companies. There can be accidents or cost overruns, poor management decisions or the risk that a mine might be closed for political reasons or nationalized.
3. Buying funds for precious metals investment
Exchange-traded funds (ETFs) have become a popular way to own multiple mining companies under a single ticker symbol, making for instant diversification to ward off some of the company-specific risks of investing in mining.
Other ETFs are backed by physical metals held in vaults, with each share representing a certain amount. These have become popular ways to invest in physical metal without having to store it yourself.
Outlook for precious metals investment
Generally speaking, Reddy said his outlook for precious metals is constructive because of falling inflation, a generally stable macroeconomic environment and demand growth from emerging markets and emerging technologies.
Gold
For gold, he sees the combination of possible dollar weakening and continued federal funds rate cuts as supportive. When interest rates fall, non-interest-bearing assets like gold can become more attractive.
Emerging market central banks may also be a source of gold demand, and geopolitical uncertainties might buoy the safe-haven metal, he said.
Silver
“Silver toes the middle ground as both a haven asset and an industrial input, which may position it optimally should economic conditions remain resilient and global demands rise,” Reddy said. “Additionally, the structural growth trends in the solar energy sector may represent a viable source of long-term demand for silver.”
Platinum and palladium
Meanwhile, limited mine production and persistent global deficits may act as short-term floors for platinum pricing.
“The outlook for both platinum and palladium will likely depend on global automotive production, as industrial buyers continue to work through existing inventories of precious metals,” he said. “Prospects for a soft landing within the United States, as well as hopes for a recovery in Chinese demand, offer possible tailwinds for the sector. We believe that there are also long-term structural demand growth opportunities for these metals, as renewable investments ramp up.
What to know before investing in precious metals
Before investing in precious metals, Ebkarian said investors should determine whether they are looking for long-term wealth preservation, capital appreciation or portfolio diversification. They should also determine an exit strategy when thinking about what metal to invest in and whether to do that through stocks, physical metal or other options. Considering liquidity is an important part of that, as some metals and investment vehicles are more easily sold than others.
Gold is the best option for long-term investments, while silver might be better for short- to mid-term objectives, he said. Platinum might be better for portfolio diversification, exposure to industrial demand and potential for price appreciation, while palladium could be better suited for those who want to capitalize on strong automotive demand, supply constraints and potential price growth, he added.
“Consider diversifying your wealth into two or three metals versus choosing one over the other,” he said. “This allows you to minimize risk.”
Frequently asked questions (FAQs)
Which precious metal is the best investment option for beginners?
Reddy said gold and silver might be best for beginner investors given their large trading markets and high liquidity.
“Gold is the more easily understood of the two, given its primary use as a store of value,” he said. “By contrast, silver’s lower price point may make it an accessible investment for new precious metal investors.”
How much should you invest in precious metals?
Cheveley said institutional investors often allocate 5% to 10% of their portfolios to precious metals, while retail investor allocations vary based on their portfolio and risk requirements.
Reddy reiterated that 5% to 10% figure would be an appropriate part of a diversified portfolio as an upper bound for precious metals.
“Generally, we think that precious metals should make up a limited part of investor portfolios, given their lack of corresponding cash flows and cyclical behavior,” Reddy said. “It’s important that any allocation to precious metals be accompanied by a broadly diversified portfolio of stocks and bonds to avoid negatively impacting long-term performance.”
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Various forces are fueling gold’s rise. We take a look at whether it makes sense to latch on to the rally.
Gold is glittering, although not necessarily for the reasons everyone is talking about.
It’s rare for gold to beat stocks, but it’s doing so handily this year. The metal has hit no fewer than 40 record highs, the latest on Sept. 26, when it reached $2,695 an ounce. Prices got a lift after Iran attacked Israel. Its 28% year-to-date return beats the S&P 500.
Short-term trading is part of it. Hedge funds have piled in—collectively they are more bullish than at any time since at least the mid-1980s, according to an analysis of futures market data by Bespoke Investment Group. Some Wall Street firms expect more gains: Bank of America and Citigroup see gold at $3,000 next year, good for an 11% gain from recent prices.
But what’s really behind gold’s ascent? Everyone has a story: falling interest rates, central-bank buying, the rising deficit, or a hodgepodge of horribles like wars, pandemics, and erosion of the dollar’s purchasing power.
There’s truth in all of it, yet most of the stories explaining gold’s rise aren’t as strong as they appear. Gold has support, but it’s important to know what it is, especially if you want to add some to your portfolio.
Consider the interest-rate tale. The idea is that gold should rise as rates decline, which pushes down bond yields and makes bonds less appealing. Gold’s rise this year coincided with the market’s anticipation of rate cuts by the Federal Reserve, along with hopes for more cuts in the pipeline.
But there’s a muddled history of gold and interest rates: According to a 2021 study by researchers at the Federal Reserve Bank of Chicago, soaring inflation expectations from 1971-80 coincided with a surge in gold. The metal’s prices then fell in the early ’80s as inflation and rates started cooling.
In more recent history, gold has been inversely correlated to long-term “real” yields, adjusted for inflation. The idea is that if you own a “risk-free” Treasury bond, for instance, your inflation-adjusted yield will look less attractive as rates fall. That makes gold—and other tangible assets like real estate—more appealing. From 2001 to 2012, long-term real interest rates fell about four percentage points, accompanied by an “over fivefold rise in the real gold price,” the Fed researchers found.
Fund manager Pimco has estimated that a one percentage-point decline in real rates for 10-year Treasury notes should lead to a 24% increase in gold prices. Yet Pimco acknowledges that the relationship hasn’t held lately—gold rallied in the past two years when interest rates were higher. And the real yield on the 10-year Treasury is historically low at around 1.5%, leaving little room for more declines.
Other forces fueling gold’s rise include central banks. Led by China, India, Poland, and others, central banks bought more than 1,000 metric tons of gold in both 2022 and 2023, according to the World Gold Council. Central-bank buying has represented up to a quarter of global gold demand in recent years. Recently, however, purchases have begun to slow as prices crept up. China stopped buying gold in May. Overall, central-bank purchases amounted to just 183 metric tons in the second quarter, down 39% from 300 metric tons in the first quarter.
Gold still only represents 5% of China’s foreign currency reserves, leaving plenty of room for more large purchases. China and other large-scale buyers could become increasingly sensitive to gold prices. But if the dollar loses value as U.S. interest rates fall, central banks in China and other countries may pick up more gold as a reserve currency (though it would be more costly).
Gold bulls are pinning hopes on retail investors stepping up and buying through exchange-traded funds. Investors pulled more than $4 billion from these funds in 2023 as prices climbed, according to Morningstar data. Money continued to pour out during the first half of 2024, but fund flows turned positive in July.
“Gold ETF holdings are starting to increase,” says Imaru Casanova, portfolio manager of the VanEck International Investors Gold fund. “We see the re-emergence of Western investors as a very strong near-term catalyst.”
Longer term, gold bulls argue that the metal will hold up against the dollar or other currencies losing value. Granted, this is an ancient argument promoted by those who constantly worry about governments inflating away the value of their “fiat” currencies. And it doesn’t necessarily mean gold will beat other “real” assets like commodities or real estate. Stocks with cash flows and dividends would also be a hedge.
The idea, though, is that we’re entering dangerous fiscal territory: The U.S. debt has swelled to more than 120% of GDP, and neither Vice President Kamala Harris nor former President Donald Trump has spent much time talking about curbing the deficit or the country’s $35 trillion public debt.
In theory, the growing imbalance between tax receipts and spending will force the government to “print money,” leading to dollars losing value and prompting people to buy gold, due to its relatively fixed supply. (The same argument is made for Bitcoin as “digital gold.”)
Some advisors say that’s a good reason to buy. “It doesn’t matter who is running the government; they are both spending,” says Arnold Van Den Berg, founder of Austin, Texas–based registered investment advisor Century Management. The firm started adding gold to clients’ portfolios two to three years ago and now has it at 6% to 7% of most accounts, says Van Den Berg, who worries about inflation eroding the purchasing power of dollars.
“We’re not gold bugs. I bought gold in the 1970s, but we didn’t own it again until a few years ago,” he says. “We can’t predict what inflation is going to be but I have a pretty good sense history repeats itself.
Some fund managers like the geopolitical argument. Gold’s recent rally coincided with Russia’s invasion of Ukraine in 2022. On Oct. 1, as Iran fired missiles at Israel, gold rose 1%. Pimco portfolio manager Greg Sharenow is bullish on gold, partly because geopolitical instability has increased. Russia’s invasion of Ukraine “was a fracturing of the world order,” he says.
What’s an ounce worth? Gold doesn’t have cash flows, so analysts try to peg prices to other commodities, demand from China, and factors like jewelry demand in India. Data analytics firm Quant Insight uses mathematical models to gauge which macroeconomic factors are driving prices; they conclude that gold today is most closely linked to copper—a proxy for Chinese growth. The firm says gold is more or less fairly valued, given today’s macro picture.
Other firms see gains ahead. Leuthold Group notes that gold historically does well after each rate cut in an easing cycle and actually gains momentum as the cycle progresses and the dollar weakens. “The rally looks a bit extended in the near term,” the firm said in a recent note, but “there is plenty of room for upside from a medium- to long-term perspective.”
There are a number of options for investors, including bullion, mining stocks, and gold ETFs.
Buying bullion holds a certain appeal, and has been a hit for Costco Wholesale: Members rush to snap up $2,689.99 single-ounce bars that quickly sell out. But apart from the hassles of storage, selling bullion may require a dealer who will charge a markup— sometimes as much as 5% to 10%.
Gold miner stocks present a different problem. While cheap and easy to trade, their share prices don’t always match gold’s price moves. That has been especially true over the past several years, when higher labor costs cut into profit margins. While gold prices have jumped 71% over the past five years, the VanEck Gold Miners ETF has returned 44%. Gold miners have leapt ahead over the past few months, but the mining industry’s ups and downs are an added variable.
That leaves ETFs like the $75 billion SPDR Gold Shares and the $32 billion iShares Gold Trust . These funds charge fees—0.4% for the SPDR fund and 0.25% for the iShares version—but they offer direct exposure to gold, and investors can buy and sell them cheaply and easily in a brokerage account.
How much to own depends on your appetite for insurance. Arnold’s approach is in line with some asset allocation research, which argues that gold can smooth your portfolio’s returns. Most advisors recommend keeping allocations below 15%.
Keep in mind that if gold keeps rallying, it may be for bad-news reasons. Pessimism about the economy’s future is usually positive for gold, according to academic research. Watch the University of Michigan surveys of consumer sentiment. Gloomier forecasts by consumers are good for gold and worse for stocks.
“Gold is the counterinvestment,” says Martin Murenbeeld, editor of Capitalight Research’s Gold Monitor. “Have a little in your portfolio and hope it doesn’t go up.”
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