Buy the Dip?

Why I wouldn't rush to start buying stocks just yet... Buy the Dip?    Dear Reader, Stocks are "rebounding" today from yesterday's brutal sell-off. The S&P500 is up +1.74% and the Nasdaq comp is up +1.72% as I write. You might be wondering if it's safe to declare yesterday's bloodbath a run-of-the-mill correction and to "buy the dip". But personally, I don't think that's a great idea just yet. In fact, I plan on selling a few more positions while they are up today. At the end of the day it doesn't really matter where stocks land. The underlying fundamentals that are plaguing the economy did not disappear overnight. And fixing them will not be so easy. This will all take time to play out. And yesterday the market merely caught a whiff of what we've been smelling for the last year. Record credit card interest rates. Historically low savings. And default trajectories on auto loans not seen since 2007... These issues of consumer weakness are early indicators that the underpinnings of the economy are breaking apart. And these issues are not going to magically solve themselves. More likely than not something will soon break. And, personally, I'd rather miss out on the next "rally" then get caught in a total wipeout. But what about rate cuts? Won't those save us? It's safe to say a lot of people are banking on it. Here's some interesting reading from Jonathan Smoke, Chief Economist over at Cox Automotive. This bit was published last week (emphasis mine): According to the New York Fed’s quarterly report on household debt and credit, credit card balances have risen by $129 billion over the last four available quarters of data through Q1 2024. The most recent balance, if not paid in full, would require $20 billion a month just to cover the interest expense, which is almost double what servicing the interest on the balance would have required in Q1 2022. While most consumers may be paying their balances in full, it is very likely that an increasing number are not able to pay off the balance and therefore servicing the debt, which in turn is crowding out capacity to spend on actual goods and services or paying other bills. Unlike the Federal Government, there is a limit to what consumers can borrow. This is a key reason why consumer attitudes, credit performance, and spending are not improving despite relatively strong GDP growth and declining inflation. The consumer was in better shape a year ago, but with each passing month, capacity to spend has been reduced. And waiting only makes this worse... ...Consumers prioritize their auto debt in the U.S., as we Americans are very dependent on private transportation. Lose your vehicle and you lose mobility and potentially your livelihood. Yet with a “strong economy,” defaults are on track to be their worst since the Great Recession. That is not a good sign. Smoke then continues on as a lot of economists have been doing over the last month: by essentially begging for the Fed to cut rates. (You can read the rest [here]( if you have the time after finishing this email.) But while Smoke is undoubtedly correct about the deteriorating state of the economy, his pleas to cut rates are more representative of self-interest than a real solution. You see, Smoke is in the business of selling cars. Or his employer is at least. So he's arguing for lower rates. For context, the car industry is in an incredibly difficult spot right now because consumers can no longer afford what automakers are selling. And it's true that rates have something to do with it, but the astronomical increase MSRPs (the true culprit) is conveniently ignored here. And this, of course, is a byproduct of inflation, which the fed can only fight by raising rates NOT by lowering them... A similar paradox is true for home sales. On the books, it looks like we're still close to record high home prices, which would seem to indicate a healthy market... But the absence of volume tells a different story: [United States Existing Home Sales August 2024] As we've seen with autos, home prices have exploded to the point where no one is buying anymore. And this affordability crisis is why realtors, car salesman, and everyone else interested in selling overpriced goods is cheering for rates to be lowered... They understand that the alternative is reducing prices, which means slashing profit margins or, worse, widespread layoffs. My point here is that rate cuts won't actually save us like many people are hoping... not while the Fed is fighting both ends of its mandate. And the fact that everyone is suddenly pleaing for rate cuts like beggars on the street, is proof enough that things have officially gone south. But I will urge anyone reading this not to panic, if you can help it. There are ways to defend yourself from the fallout. And there are going to be huge opportunities as this all shakes out. Some resources to help you navigate the storm are coming soon... In the meantime, some reading material and economic data: - [Further proof that the Fed can't save us]( - [Signs that real estate is starting to slip]( - [VIX marks largest single day spike on record]( With purpose, Jason Stutman   If you no longer wish to receive updates from The Back office you [may opt out here.]( The Back Office, Copyright © 2024, Angel Publishing, LLC., 3 E. Read Street, Baltimore, MD 21202. For customer service, please call [877-303-4529](tel:/8773034529). All rights reserved. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned. 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