1. Persistent Inflation Challenges Fed's Strategy
October's CPI report revealed ongoing inflationary pressures, with overall CPI rising to 2.6% and Core CPI reaching 3.3%. This marks the 42nd consecutive month of Core CPI above 3%, the longest period of elevated inflation since the early 1990s. Transportation costs have surged 8.2% over the past year, driven partly by a dramatic 53% increase in auto insurance rates over three years—the highest since 1975-78. Meanwhile, shelter costs remain stubbornly high at 4.9%, marking the longest period of elevated housing inflation since the late 1980s.
Key Takeaway: Despite the Fed's efforts, inflation continues to show remarkable persistence, particularly in key sectors affecting everyday Americans.
2. Bond Market Sends Warning Signals
Since the Fed's initial rate cut two months ago, the 10-year Treasury yield has climbed 76 basis points to 4.42%, departing significantly from historical patterns during easing cycles. Market expectations for end-2025 rates have shifted dramatically, rising from 2.8% to 3.8%. The probability of a December rate cut has declined to 56%, down from 72% last week, with the Cleveland Fed projecting even higher inflation readings ahead.
Key Takeaway: Bond markets are signaling skepticism about the Fed's ability to achieve a smooth transition to easier monetary policy.
3. Government Spending Surges Amid Deficit Concerns
The U.S. federal deficit has ballooned to over $2 trillion in the past year, reflecting a growing disparity between revenue and spending. Over the last decade, while federal tax revenue increased by 60%, government spending surged by 93%. This widening gap raises concerns about fiscal sustainability, particularly as interest payments on the national debt continue to grow.
Key Takeaway: The divergence between government revenue and spending growth suggests mounting fiscal challenges ahead.
4. Spectacular Year for Equities Continues
The S&P 500 has delivered an impressive return exceeding 25% in 2024, substantially above its historical average of 9.8%. While such returns might seem abnormal, they're more common than many realize—occurring in 27% of years since 1928. In contrast, annual declines of 25% or more have happened only five times in the past 96 years, highlighting the market's long-term upward bias.
Key Takeaway: Despite appearing extreme, this year's strong returns fall within historical patterns of market behavior.
5. Cryptocurrency Renaissance
Bitcoin has surged over 40% since the election, recently hitting $99,000—a remarkable journey from first crossing $1,000 in November 2013. Even Dogecoin has reached a market value exceeding $60 billion, surpassing 331 S&P 500 companies. This resurgence in crypto assets comes amid broader market strength and increased institutional adoption.
Key Takeaway: Cryptocurrency markets are experiencing a significant revival, with both established and alternative digital assets reaching new milestones.
6. Consumer Credit Concerns Mount
Credit card delinquency rates have risen to their highest level since 2012, with over 11% of balances now 90+ days past due. This trend coincides with elevated housing costs forcing many lower-income households to make difficult choices, including reducing restaurant visits, canceling vacations, and even skipping meals.
Key Takeaway: Rising delinquency rates suggest growing financial stress among American consumers.
7. The Long-Term Cost of Conservative Investing
A striking illustration of the opportunity cost of conservative investing shows that $100,000 invested in U.S. stocks over 30 years grows to an average of $2.5 million, compared to just $395,000 for the same investment in Treasury Bills. This significant difference highlights the potential long-term cost of staying too conservative with investments.
Key Takeaway: While cash positions may provide short-term safety, they can significantly impact long-term wealth accumulation.
Next week, we'll be closely watching new inflation data and the Cleveland Fed's projections as markets assess the probability of a December rate cut.
