The S&P 500 and Nasdaq broke a string of daily down days in trading Thursday, with the latter being up nearly one full percent point on the day. Investors continue to be treated to a series of conflicting economic signals, something that has become a mainstay trying to interpret the markets in recent months.
The Leading Economic Indicators edged down in May, their fourteenth straight month of declines. The yield curve remains deeply inverted with the divergence between the two-year and ten-year treasury yield not past the 100-bps threshold. Meanwhile, May Existing Home sales rose .2% on a month-over-month basis. A better-than-expected number and one that follows a blowout Housing Starts report earlier this week.
Clarity is certainly hard to find right now about equities or the economy. I went out with a friend the other night to celebrate her birthday at the local saloon. One of her favorite bands was playing that night. A mutual friend attended the celebration as well. Like so many people in my neighborhood in Delray Beach, she is a recent transplant. She moved down here during the pandemic after two decades living in Manhattan.
She is the president of a boutique macro financial research firm. She had just got back home from a month on the road interviewing senior credit officers, risk management heads and the like as she prepares her firm's quarterly economic outlook. During the night I got into a conversation about current economic conditions and what lies ahead. I wanted to know if my concerns about deteriorating credit conditions and a deeply inverted yield curve were overblown.
She looked me straight in the eye and said, "Bret, I don't want to be an alarmist but this is feeling more and more like 2008 all over again." This obviously put a bit of a damper on the birthday celebration but did yield several interesting tidbits around how credit conditions are tightening throughout many industries.
In addition, it usually takes 12-18 months for policy moves from the Federal Reserve to be fully felt in the economy. Given the fact the central bank just started to raise interest rates in March of 2022, she expects these impacts to be more and more evident by summer and she is extremely bearish on the outlook for equities and the credit markets.
As Mark Twain famously quipped "History never repeats itself, but it does often rhyme." Unlike 2008, subprime will not be the focal point of any new credit situation. It is likely commercial real estate that will be in the eye of any upcoming storm. One can find unfolding and increasing signs of duress in this sector.
Yesterday, I came across a snippet about an over $195 million commercial mortgage-backed securities loan on a luxury apartment tower on Manhattan's Upper West Side that is moving towards default. The owner will not be able to roll over the loan that comes due in November. Now keep in mind, Manhattan rents are at all-time highs. If this is happening on the residential side of things, I can only imagine the challenges the office and retail space is going to face as their debt loads need to be refinanced.
All this just confirms my ongoing decision to position my portfolio quite bearishly. I rolled over some funds that became available this week as some three-month Treasuries were redeemed into new short term Treasury holdings. In addition, I added to my shorts in Apple (AAPL) and RH (RH) this week. I also initiated a short position in a new name I will reveal this weekend as my option trade of the week.