Stocks are Hot. Jobs are Hotter. What’s Next?

0:00The stock market is setting record highs. In fact, it's setting multiple record highs. Both the S &P 500 and the Dow Jones have hit record highs. The Dow closed above 38 ,000 for the first time. Last week, the S &P 500 set five consecutive days of new record highs, with each day higher than the last. On Monday, it closed above 4 ,900. It's dropped a smidge since then. I'm recording this on Wednesday night, January 31st. And as of Wednesday night, it's down 1.6 % off of its all-time high, but it's still above 4 ,800 and roaring strong. So with the stock market in an absolute roar, combined with record low unemployment, unemployment has been below 4 % for 23 consecutive months, plus news from the Fed.

0:53The Fed had its first meeting of the year, January 30th and 31st. As we parse through all of this economic news, what does it mean and how does it affect you? That's what today's episode is all about. Welcome to the Afford Anything podcast, the show that understands you can afford anything but not everything. Every choice that you make is a trade-off against something else. And that doesn't just apply to your money. That applies to any limited resource you need to manage, like your time, your focus, your energy, your attention. Saying yes to something implicitly means that you're turning other things away.

1:25So, what matters most and how do you make decisions accordingly? Answering these two questions is a lifetime practice, and that's what this show is here to facilitate. My name is Paula Pant. I am the host of the Afford Anything podcast. As of right now, we air a new episode every Wednesday as our normal weekly episodes, but once a month on the first Friday of the month, we air a bonus episode. So welcome to the February 2024 First Friday bonus episode. And by the way, for those of you who are wondering why I emphasized the as of right now, it's because we have a big announcement. We've said it on the podcast before, but in case you haven't heard, we are upping the game to two days a week.

2:12That's going to begin at the end of April. Episode 500 airs April 24th, 2024. for. We're doing a big live event, live in-person event in New York City. Details about that to come. After episode 500, we are moving to two days a week. And so first Friday is going to become every Friday. We're going to be airing new episodes on Tuesdays and Fridays, starting with episode 501. But in the meantime, today's episode is episode number 486. It's the first Friday in February, and let's talk about the major economic news of the month. First of all, the S &P 500 is on an absolute tear. Last week, it had a record-breaking six-day streak, five of which were days in which it posted new highs.

3:03So five consecutive days of new highs, and it remained strong this week. And meanwhile, the Dow also topped 38 ,000 for the first time ever. Why does this matter? Well, you've heard the term bull market and bear market, right? But what do those actually mean? A bull market has two attributes. Number one, a market is considered a bull market when it is 20 % above its most recent low. Now, the S &P 500's most recent low was in October of 2022. And it hit the milestone of rising 20 % above that low in June of 2023. So one of the two common definitions of a bull market, which is 20 % above its most recent low, the S &P 500 already did that.

3:54It did it back in June. But there's a second definition of a bull market. And that is when a market reaches a new record high. And the reason that the Dow and the S &P hitting new record highs is such big news is because this demonstrates that by any definition of the word, or all definitions of the word, we are firmly, unequivocally in a bull market. So both definitions of a bull market, the definition of 20 % above most recent low and the definition of new record high, we have now achieved them both. That's why there's so much buzz around this. Now,$11.4 trillion in funds are benchmarked to the S &P 500.

4:41So this translates to rising stock portfolios for a lot of ordinary Americans. Pension funds, retirement accounts, people are seeing their 401k balances grow. On top of that, the national unemployment rate is holding steady at 3.7%. That was the rate as of December. Unemployment has been, as I mentioned before, below 4 % for 23 consecutive months. These are the best unemployment stats that we have seen in 50 years. If we want to get a little bit more granular, in December, healthcare added 38 ,000 jobs. Government added 52 ,000 jobs. Construction added 17 ,000. Leisure and hospitality added 40 ,000.

5:25Social assistance added 21 ,000. Retail added 17 ,000. Professional and business services added another 13 ,000. The one sector that declined is transportation and warehousing. That declined by 23 ,000. So in nearly every sector, all but one, we are seeing employment gains across the board. Meanwhile, inflation appears to be under control. According to data published by the Bureau of Labor Statistics in early January, the Consumer Price Index for Urban Consumers, which is basically a measure of inflation for people who live in U.S. cities, during calendar year 2023, rose 3.4%. Now, there are two ways to measure inflation.

6:14You can use an index that includes food and fuel, groceries and gas, or you can use an index that strips those two factors out. The reason that you would do that is because both food and fuel are very volatile and subject to price shocks that can sometimes reflect circumstances unrelated to inflation. So for example, a major weather event, a major storm, a war, a disruption or clog in shipping routes, all of these things can have price shocks on food and fuel. And those price shocks do not necessarily reflect inflation. That's the reason that we have these two separate readings. So including food and fuel, we arrive at the 3.4 % number.

6:59That's across 2023. If we look at all items minus food and fuel, the numbers do get a little bit worse. We get to 3.9 % over the last 12 months. So we are still far from the Fed's target rate, which is 2%. But we have improved significantly since inflation peaked at 7 % in 2022. And by the way, the data for December was much better than the data across the last 12 months. When we look at the data for December, we see core inflation at 2.9%. So again, we're still not at the Fed's target rate, but we are a heck of a lot closer than we have been. Now, this trifecta of factors, this combination is incredibly unusual.

7:49We've talked about strong economic growth as reflected in the performance of the Dow and the S &P 500. We've talked about low unemployment and we've talked about a dramatic lowering of the inflation rate. Right. We've talked about those three things. To have that combination is incredibly unusual. It is very, very strange, historically speaking, to have a situation in which we are reducing inflation and cooling the economy without increasing unemployment. Generally, the playbook for decreasing inflation, which is to make the cost of capital more expensive, which reduces both consumer spending and business spending, that historically leads to higher levels of unemployment.

8:38full stop. If people are spending less and businesses are investing less, borrowing less to grow, usually that means jobs are getting cut. But what we see right now is despite the high interest rates, despite the Fed's work at cooling the economy, we still have a very resilient, very robust economy. The economy grew at 3.3 % in the last quarter and 4.9 % in the quarter before that. Now, I know that the economy doesn't necessarily feel resilient because what we hear about in the headlines so often, we hear about layoffs. The LA Times just had layoffs. eBay had layoffs. Some TikToker went viral for live streaming herself getting laid off, which is an absolute paragon of the remote work era.

9:25But in spite of these high profile headlines, the data shows consistent job growth and persistent low unemployment. But we never hear about these because something like Bob's Garage is hiring six more mechanics is not something that's going to make headlines. And yet this is how jobs continue to grow every day. Now, what we know is that there is a disconnect between economic data and consumer sentiment. People generally are more pessimistic than the facts warrant. We know this from the number of people who are searching Glassdoor.com using search terms that indicate a fear of getting laid off.

10:10But there is a spot of good news, and it comes from the University of Michigan. So Michigan tracks what's called the Consumer Sentiment Index. It is, as the name implies, an index that measures how people feel about the economy. How confident is the ordinary American when it comes to their finances? And what they have found this month is that consumer sentiment currently is at its highest level since July of 2021. Largely, people are becoming more confident that inflation is under control. And overall, people are feeling better about their finances. Over the last two months, consumer sentiment has climbed a cumulative 29%.

10:52That's the largest two-month increase since 1991. But there's bad news, which is that historically consumer sentiment is lower than average. Sentiment is still 7 % lower than the historical average as measured from 1978 through today. Back to the good news, sentiment is rising at a pretty consistent rate across all age, income, education, and geographic distributions, which is another way of saying, So everyone's feeling more optimistic than they were before, at least more optimistic than they have been for the last two years, since July of 2021. But even though the trend is improving, people are still not as optimistic as they were back in 2017.

11:39If you look at the trend line from 2014, 2015 through 2020, consumer sentiment was quite high. And then, of course, in 2020, there was a steep decline for obvious reasons. And it improved a bit after that, but then it absolutely tumbled as inflation soared. And so now we're climbing out of that. So far, we've talked about the unusual trifecta of strong growth, low unemployment, and low inflation, this very unusual trifecta that we've got going on right now. And we've contrasted that with consumer sentiment, which could be described as more pessimistic than it needs to be or more pessimistic than the data warrants, but getting better.

12:26With all of that established, let's turn our attention to the Fed, which just wrapped their first meeting of this year on January 30th and 31st. To zoom out a little bit and establish some context, the Fed meets eight times a year. Their first meeting of the year happened this week. The next time they meet is going to be in March, March 19 and 20. After that, they're going to meet April 30, May 1, right at the border of April and May. And then they're going to meet again in June, in July, in September, in November, and in December. Every time the Fed meets, they do one of three things. They either raise interest rates or lower interest rates or hold interest rates steady.

13:06I mentioned earlier that inflation peaked at 7 % in 2022. In early 2022, the Fed's interest rate was near zero. Starting in March of 2022, the Fed raised interest rates 11 times, which is how we went from a rate of near zero to a rate, a benchmark overnight interest rate of between 5.25 to 5.5%. And by the way, when we talk about the Fed raising or lowering interest rates, we're talking about the federal funds rate. Now, this is the target interest rate at which commercial banks will borrow money from one another or lend money to one another overnight. So if one bank wants to lend their extra reserves to another bank overnight, that's the rate that we're talking about when we talk about these Fed meetings.

13:56And so the reason, if you're hearing me say 5.25 % to 5.5 % and you're thinking, hey, when I go to the bank to take out a mortgage, I'd love to see 5.25%. Why am I seeing 7? It's because the rate that you or I would pay as ordinary individuals is going to be a couple of percentage points greater than that overnight federal funds rate that's set by the Fed. Right now, that benchmark overnight rate is between 5.25 to 5.5. And what the Fed is tasked with is not keeping it too high for too long, because if they did so, then they would be cooling the economy more than necessary. But they also don't want to lower that rate too early, because to do so would be to declare premature victory over inflation and risk a situation in which inflation runs away.

14:52As widely expected at this meeting, they left the federal funds rate unchanged. That's no surprise to anyone. In fact, the president of the Federal Reserve of Cleveland said in an interview on Bloomberg television that March is probably too early for a rate cut. That's a direct quote. Quote, March is probably too early. So it's no shock to anyone that this week they elected to leave rates unchanged. It's still up for debate what they are going to do in March. If they'll continue to leave it unchanged in March or if they will begin cutting in March. We'll know the answer to that when March comes around.

15:31But as widely expected, at this week's meeting, they decided to leave rates unchanged. Irony of a strong economy is that having a strong economy actually gives the Fed reason to keep interest rates higher longer. The Fed's dual mandate is to keep inflation under control while also keeping employment high slash unemployment low. They are tasked with doing both. The fact that our economy is so strong and that unemployment is so low gives them leeway to be a bit more aggressive about keeping interest rates high in order to keep inflation low. Now, we've talked about a lot of optimistic news, so we do need to balance this with some red flags, some warning signs that we should keep our eyes on.

16:16the average American credit card debt balance has ticked up, as well as buy now, pay later loan balances. So buy now, pay later technically is not considered a credit card balance. It is a loan balance, but both credit cards and buy now, pay later balances, both of those have increased. So what that shows is that consumers are willing to spend, but much of that spending is being fueled by debt, which of course leaves consumers in a more vulnerable position if the tides were to change. On top of that, we've talked about stock market growth. A lot of that growth has come from what's called the Magnificent Seven.

16:56These are mega cap companies, Amazon, Apple, Alphabet, Meta, Microsoft, NVIDIA, and Tesla. These seven companies have been an outsized driver of the growth of the stock market, which means a few things. It means that all of us are a little overexposed to these companies, arguably overexposed to these companies. It also means that any major shock to one of these companies could spell trouble for the overall market. And it means that underperformance of certain companies is being buried under the overall growth. So for example, for a while now, Amazon has been planning on acquiring iRobot, which is the maker of the Roomba.

17:44And this was supposed to be a$1.4 billion acquisition, but it came under heavy scrutiny by the Federal Trade Commission, the FTC, which reportedly told Amazon that they planned on blocking the deal due to antitrust concerns. There were several reports that came out stating that FTC staff told Amazon that they planned to sue in order to block the merger. Amazon then chose to abandon the deal. And once Amazon walked away from the deal, stock in iRobot plummeted. So I share that story as a bit of an example of the contrast between the broad macroeconomic realities that come from tracking a major index versus the micro realities that can heavily impact the investors the employees that comprise any given company inside of it.

18:40iRobot announced that it was going to lay off 31 % of its staff following the collapse of the intended acquisition, and iRobot's CEO stepped down. So it was clearly an episode of succession happening in there. We're going to take a quick break. When we come back, let's turn our attention to housing, because particularly as interest rates drop, this is going to be a fascinating and tumultuous year for housing. In fact, beyond just interest rates dropping, there is drama inside of the National Association of Realtors. There is, of course, the most recent court ruling related to those huge fees that you pay every time you sell your home.

19:22We're going to talk about all of that after this break. We're why your car insurance has suddenly become incredibly expensive. Believe it or not, auto insurance is a lagging indicator of inflation. So if your car insurance rates just got jacked up, we're going to explain why. We're also going to address a great question that I got on YouTube. Someone asked, hey, if we're dollar cost averaging into an index fund, why do we care if the stock market is hitting new highs? It's a fantastic question, and we're going to address that as well. All of that's coming up after the break. You know, when you're a kid, you dream about being an astronaut or working with wildlife or all these cool things.

20:08And then when you grow up, you think about not just what you want to do, but also you think about this other layer to it, which is how do I want to impact the world? What legacy do I want to leave behind? And how do I want to do that through my work? For a lot of people, that's when you start dreaming about owning your own business. But to do that, you're going to need a website, a payment system, a logo, a way to find new customers. And that can be really overwhelming and it's a big workload. That's where today's sponsor, Shopify, comes in. Shopify is the commerce platform behind millions of businesses around the world and 10 % of all e-commerce in the U.S., ranging from household names like Mattel and Gymshark to brands that are just getting started.

20:46If you need a website, Shopify's got you from the get-go with beautiful ready-to-go templates. You can get help with everyday tasks like writing product descriptions, generating discount codes. Shopify can help you find your customers with easy-to-run email and social media campaigns. And they have award-winning 24-7 customer support. Turn those dreams into and give them the best shot at success with Shopify. Sign up for your one month,$1 per month trial period and start selling today at Shopify.com slash Paula. Go to Shopify.com slash Paula. Shopify.com slash Paula. Kevin Harlan here. Tomorrow, the NBA on Prime Crew and I are back with another spectacular NBA doubleheader.

21:31The action starts with one of the best rivalries in sports as Luka Doncic and the Los Angeles Lakers take on the Boston Celtics with Jalen Brown. Then Cooper Flagg and the Mavs take on SGA and the Oklahoma City Thunder. It all comes your way tomorrow on Prime. And if you're not a Prime member, that's not a problem. Sign up for a free 30-day trial to get started today. The Lakers and Celtics, the Mavs and Thunder. Coverage starts tomorrow at 6.30 p.m. Eastern. Only on Prime. Restrictions apply. See Amazon.com slash Amazon Prime for details. This year, give a gift that goes far beyond the moment, an Invest 529 account.

22:15Whether it's a child, grandchild, or someone just starting out, you're helping them safe for education that can open doors for a lifetime. Invest 529 is a tax-advantaged way to help save for college, trade school, or even apprenticeship programs. It's flexible, easy to start, and you can contribute any amount, big or small. Because the money can grow tax-free, it's a gift that can really build value over time. So instead of giving something that gets used up or set aside, give the gift that can change a life. Start an Invest 529 account today. Go to invest529.com to learn more and get started.

22:53Investments involve risk. Results vary. Consult with your financial and tax professionals. Administered by Commonwealth Savers Plan.

23:08Welcome back. Let's dive right in with the housing market. Here's what we know. Existing homes, meaning homes that are not new construction, homes that have been lived in by at least one previous occupant, these existing homes typically account for 90 % of home sales. And last year, there's new data out, last year the sale of all homes generally fell to its lowest level since 1996. In other words, the sale of all homes generally fell to its lowest level in 27 years. The sale of existing homes fell to its lowest level in 30 years. That's another way of saying that of the homes that were sold, new construction was more desirable than existing homes.

23:51Now that is good news for builders. And builders, frankly, need some incentive to be able to build because the cost of new construction has gone up dramatically. This is an issue that really began during the pandemic when the cost of underlying materials such as lumber and copper skyrocketed. Labor costs, of course, have gone up and that has only been exacerbated by inflation. And so with the cost of new construction rising so dramatically, compounded by now with high interest rates, the cost of capital that the builders need to borrow in order to build also rising dramatically. All of that comes together to create incredibly high both operating costs and financing costs when it comes to building a home.

24:40In other words, the materials are expensive, the labor is expensive, and the cost of borrowing in order to float those two is expensive. And what that means for us is that new construction homes continue to get more expensive because builders need a higher price in order to cover all of their costs and justify the risk that they're taking. When we look at data on new privately owned housing units started, and this data comes from the St. Louis Fed, we see some mixed news. New construction plummeted in 2020, rose throughout 2021 and 2022, and right now is down from its 2022 peak, but is still higher than where it was in 2019, 2018, 2017.

25:31So if we zoom out and we look at the trend line from 2010 through today, that line is sloping up and to the right, which is exactly where it needs to go because we need new residential construction in order to staunch the bleeding to help take care of this massive housing supply shortage that we have. By the way, I've said this on the podcast many, many times, and I will repeat this for as long as it takes to convey the message. As a rental property investor, the best thing that you can do in order to improve housing affordability, in order to be part of the solution, is to increase supply and increase density.

26:13And so what that means is if you have a single family home and you can retrofit the basement or a freestanding garage or an attic into a separate autonomous unit, and therefore you take one unit and turn it into two, that increases housing supply, which helps solve the supply crisis that we're in. And it's also fantastic for your bottom line. And if you can't do that, if that's too much of a project or if the zoning or permitting in your locality won't allow you to do so, or if the footprint just doesn't allow it, the footprint of the home, the other thing that you can do, if possible, is build a partition wall and turn a two-bedroom into a three-bedroom through a relatively inexpensive retrofit.

27:02And in doing so, while the number of new units hasn't increased, the density within that unit has increased because now a two bed is a three bed. And so, again, it improves your bottom line. It makes you more money as an investor. Right. You're earning a return and you're contributing to the solution. It's one of the most amazing ways to do well by doing good and to contribute to solving the housing supply shortage. Also, by the way, the other thing that you can do is just don't let your units sit vacant. There are a lot of big Wall Street investors, big hedge fund investors that gobble up a bunch of properties, and then they just let the units sit vacant for a long time.

27:48If you can turn those units and obviously don't rent to people who don't meet your qualifications, right? Don't put yourself at risk. But if you can be better than the Wall Street hedge funds that are just letting properties languish because they're fundamentally not in the property management space and so they simply don't have the personnel to be able to rent the properties, right? There are all of these properties that are just sitting vacant. If you can, at a minimum, just don't let your properties languish vacant, that does a lot to solve the supply crisis as well. So that's an aside. Back to the data.

28:27What we know is that home sales last year cratered, particularly the sale of existing homes. And we also know that median home prices hit a record high last year. So what's going to happen in 2024, particularly as mortgage interest rates drop? Now, we don't know how far they're going to drop, but there's almost universal consensus that over the span of the year, rates will likely drop unless there's some major black swan event, some big economic shock that we can't anticipate. Based on what we currently know, analysts are widely expecting the Fed to go through a series of rate reductions in 2024, and that means mortgage rates are going to drop.

29:11Bankrate forecasts that mortgage rates will drop below 6 % this year. Now, 80 % of existing mortgaged homeowners have a sub-6 % mortgage. So four out of every five current homeowners who have a mortgage on their property will still be subject to what's called the lock-in effect, which describes the position of being disincentivized to sell your home because your current mortgage is substantially cheaper than the prevailing rates. So even with sub-6 % mortgage rates, 80 % of homeowners with mortgages will still be locked in, be incentivized not to sell. But it does free up those 20 % of homeowners who have current mortgage interest rates that are higher than 6%, who are not subject to the lock-in effect.