The Affordability Crisis Will Impact Policy
Global capital markets demonstrated a generally positive trend last week, particularly in US equities, as investors continued to price in the possibility of near-term interest rate cuts by the Federal Reserve, supported by mixed (yet increasingly dovish) US economic data. All major US indices posted weekly gains: the Nasdaq Composite led the pack with a gain of approximately 0.9%, followed by the Dow Jones Industrial Average and the S&P 500 Index, which rose about 0.5% and 0.3%, respectively. This optimism was buoyed by inflation data that largely met expectations and a surprise drop in private-sector payrolls, reinforcing expectations for a Fed rate cut at their upcoming meeting.
Interest rates rose modestly on the week, with the yield on the 10-year T-note rising 5bps from 4.09% at the start of the week to 4.14%. The short-term rally in yields was likely driven by the market repricing the Fed's rate path (fed fund futures are now pricing only two additional cuts by the end of 2026 — down from three just a week ago — following this week’s widely expected move). The Fed is generally expected to cut rates at this week's meeting, but it is looking more like this will be the last cut for some time unless we see a more negative turn in future economic data. There is a consensus emerging that after a Q4 growth slowdown on the back of the government shutdown, we will be in for a burst of growth in Q1 from the hefty tax refunds as part of the One Big Beautiful Bill Act (as much as a 1% boost to headline GDP growth). That, along with all the AI capex pledges for 2026 and the more generous depreciation allowances, has the market thinking that there is a risk that this week’s expected rate move could be the last in a long while.
At the same time, because the BoJ is now signaling a rate hike, and the ECB now has little economic reason to do anything but stand pat, the bond yield pressure from across both oceans has filtered into Treasuries, as all these markets do have some correlation with each other. This is a material near-term development as it appears that the peak in global monetary policy accommodation is in the rearview mirror. That is, until the economy gets materially weaker or a negative exogenous event were to occur, which compels policymakers to act. This subtle shift is akin to policy moving from a tailwind to a headwind and, on the margin, is not a positive for risk assets. I wouldn’t describe it as negative either – call it neutral. But neutral puts the burden of proof on fundamentals (earnings growth, tame inflation, stable employment…) to drive returns from this point forward.
Back to the broad markets for a moment, where I’d describe the price action heading into the end of the year as a bit lethargic. Sure, the total return numbers year-to-date for the S&P 500 (+16%), the Nasdaq (+22%), MSCI ACWI-ex US (+28%), Emerging Markets (+29%), Gold (+60%), and the total return from the Aggregate Bond Market (+8%) are very strong. But very little, if any, of these gains have accrued in the last 4-6 weeks, where markets have for the most part been chopping sideways. Across all the asset classes, we have gone a month or more with little net change in everything from equities to bond yields, gold, commodities, the dollar, and even Bitcoin – sure its experienced extreme volatility, but the net change is modest:
Gold ($4,220 per ounce): No change since October 15th
Trade-weighted U.S. dollar (121.4): No change since October 15th
WTI ($59.11 per barrel): No change since October 22nd
CRB (537): No change since October 23rd
S&P 500 (6,838): No change since October 27th
Nasdaq (23,505): No change since October 27th
10-year T-note yield (4.10%): No change since October 30th
Dow (47,850): No change since November 11th
Bitcoin ($92,175): No change since November 17th
Meanwhile, we are still living in a K-shaped world across many facets of the economy: low- to mid-end consumers versus high-end consumers, AI capex booming versus volume spending in the rest of the industrial space contracting. It applies to the labor market as well, not only in a no-firing and no-hiring capacity, but also in that we are seeing expanding payrolls at big companies versus shrinking headcounts at small firms. The K-shaped characteristics of the stock market have become well known, where the concentration of the top 10 largest companies as a percentage of the total value of the stock market has never been more acute in modern history than it is today.
As for the labor market, I must say the signs coming from the data we are getting are troubling, and we’re starting to see the initial signs of AI's impact. The latest Challenger data showed that in the six months to November, there have been 54,694 layoff notices due to AI implementation. Tack on another 66,866 from “cost-cutting,” which is indirectly related to the same thing, and another 113,829 firing announcements from “economic conditions,” which ranks as one of the largest six-month tallies of all time. But so far investors are willing to overlook these cautionary signs in favor of AI productivity, profit margin expansion, Fed policy support, and an expected positive fiscal impulse in the first half of 2026.
Let’s go a step further on the labor front. Through the first eleven months of 2025, there have been 1.2 million job cut announcements (well more than double the near +500k in hiring plans… an identical gap we saw back in June of 2008). Don’t just take my word for it — this is straight from the Cleveland Fed: Its data on WARN notices (Worker Adjustment and Retraining Notification Act) showed that 39,006 Americans in October across 21 states received a notice informing them of an impending layoff (U.S. labor law requires employers to provide these written warnings 60 days ahead of plant closings or mass layoffs). This represents one of the highest numbers of WARN notices since the Federal Reserve Bank of Cleveland started tracking the data back in January 2006. This bears watching as it is flagging additional weakness may be coming down the pipe.
This aligns with what we heard from Dollar Tree on its earnings call last week:
"All consumers are seeking value" “We had 3 million more households shop with us in Q3 this year compared to Q3 last year. Approximately 60% of these incremental shoppers came from higher income households, those earning over $100,000, 30% for middle income households, those earning between $60,000 to $100,000, with the rest from lower income households, those earning under $60,000. Importantly, Q3 spending growth was broad based across all income sub-cohorts, including households earnings below $20,000.”
However, I’m not overly concerned at this moment because the Federal data from tax withholding (one of the best real-time data series on the labor market) remains at a solid level, but it too is showing a deceleration in growth of labor income (from 6.5% YoY growth in July to 4.0% as of the end of October).
Another data point flashing caution is the trends we’re seeing in the Conference Board's Leading Economic Index (LEI) and the Coincident Economic Index (CEI). The LEI is a composite index that tracks things that move ahead of the economy (orders, hours worked, sentiment, credit conditions). The CEI tracks things that move with the economy (employment, income, production). The chart below from Yardeni Research tracks the LEI and CEI over the past six decades, where we are seeing a meaningful deterioration in the LEI over the past three years – not atypical to what you see as the economy transitions into a recession (vertical grey bars in the chart). However, never in the history of this data series have we experienced such prolonged decline without a corresponding (on a lag) slide in the CEI (blue line).
A better way to observe the relationship is to measure them as a ratio of LEI/CEI, where a material downturn in this ratio has preceded every recession since 1960. The latest reading is squarely in that danger zone (see chart below). When the ratio is high, leading data is strong relative to current conditions – the future looks more buoyant than the present. When the ratio falls, the forward-looking data weakens relative to current conditions – a signal the economy is losing altitude. The current value (roughly 0.86) is one of the lowest readings in 60+ years and is consistent with levels seen ahead of every recession in the sample while showing a persistent, multi-year decline – similar to pre-1980, pre-1990, pre-2001, pre-2008, and 2020 patterns.
This isn’t a data point an investor would predicate their entire investment process around, but it is a time-tested data series that warrants attention. At a minimum, it suggests now is not the time to be too far out over one's skis on the risk spectrum. However, if I’ve learned anything over the past fifteen years, it is that it’s incumbent upon any curious analyst to measure and map the economy differently today. I know there isn’t much that is actionable or definitive in that statement, but I’ve seen many ‘tried and true’ historical fundamental relationships between the economy and markets break down markedly over the past fifteen years.
This brings me to the expanding narrative making its way through the news cycle, politics, and will eventually find its way into capital markets, as I suspect it's getting to a point where policymakers will be forced to action. Let me start with an X post by Jim Bianco where he highlighted the below poll released by Politico showing that almost half (46%) say the cost of living in the U.S. is the worst they can ever remember it being (37% of 2024 Trump voters held this view). Respondents also said that the affordability crisis is Trump’s responsibility, with 46% saying it is his economy now and his administration is responsible for the costs they struggle with.
Please don’t allow my scribbles on this subject to unravel into a Red or Blue thing or a pro-Trump or Trump-Derangment-Syndrome thing. Such a digression would be missing the ‘forest for the trees’. Defenders of this administration and Trump can rightfully point to the fact that inflation is down to around 3% from the 9% peak level reached back in June 2022, but what most individuals struggling with the affordability crisis are referring to is the cumulative effect of the inflation spike over the past five years. On this front, we’re talking about households having to contend with a cumulative 25% rise in the CPI index over the past 5 years (the largest 5-year increase in four decades).
One of the biggest points of contention between economists/policy makers and regular households' interpretation of what's going on with inflation (affordability) is likely a matter of perception versus reality. Economists view inflation through the prism of year-over-year percentage changes in the CPI basket (orange line) versus a household's reality (blue line) that observes its consumption basket of goods 25% higher than it was five years ago.
We’re getting to a point where this affordability crisis is a threat to the long-term economic vibrancy of the U.S. economy. The 2025 American Family Survey asked Americans why they are limiting their family size, with ‘insufficient money’ (43%) the most common response, nearly double the next-highest response. Furthermore, 71% of Americans now say raising children is unaffordable – a 20% point spike in the last decade.
Amongst the youngest cohort (ages 18 to 29), fully 50 percent cite insufficient money as a reason they have limited or will limit the number of children they have. Half of young America is telling us, explicitly, that they cannot afford the families they want. Meanwhile, the BLS reports that inflation is running at 3 percent. The economy, we are told, is strong.
I read this, and it saddens me that a consequence of the affordability crisis where a ‘family expense bundle’ (home, healthcare, childcare, food, and transportation) is fewer children in the richest and greatest country in the world. Keep in mind, children are future taxpayers supporting social security and Medicare benefits, entrepreneurs, inventors, service providers… without an influx of youth to replace the old and aging, you throw off the balance in all sorts of cycles. Where I think leaders, both public and private, as well as economists and the affluent are losing the plot is by failing to recognize the financial challenges facing household formation today. With the gap between the family American women want (2.7 children) and the family they have (1.6), children is not a ‘lifestyle choice’, but a forced submission.
Last thing I want to touch on before signing off on this week's missive is the Supreme Court announcement on the legality of Trump's tariff policy. There is no set date for the release of their decision, but we do know it could come at any point now. Both betting markets and the capital markets are expecting the decision to go against Trump, but the President has already made it known that ‘tariff’ is his favorite word and his administration will find another way. You know what, my thinking has changed over the past decade on the tariff file, where I think effective and targeted trade barriers (tariffs) are a necessary tool for the U.S.
But I’d argue that it’s been corporations (incentivized by policy both foreign and domestic) that are responsible for the decay in Labor Share of GDP that you see in the chart below.
The opposite side of this decline in Labor Share is the corresponding rise in Corporate profits as a share of GDP (see below).
These multi-decade trends need to come back into better balance before the U.S. economy, financial system, and societal values can return to a sustainably healthy level. I'm just getting to the end of what some might view as a controversial book (Return of the Strong Gods: Nationalism, Populism, and the Future of the West by R.R. Reno), and I've found the content more thought-provoking than agreeing or disagreeing with his conclusions. But what the book did bring to light for me is that one of the most valuable assets Americans have is their U.S. citizenship. You can agree or disagree, and I’d respect your view, but I can admit that I’ve never looked at my citizenship that way. I’ve always taken it for granted because it's all I’ve ever known, but it provides some context for immigration (legal versus illegal), H-1 B visas and the manner in which corporations have abused the process, corporations arbitraging cheap global labor pools, and offshoring industrial policy.
Please don’t shoot the messenger here, and paint my rambling with a political Red or Blue brush. I’m just interpreting a wide mosaic of data, trends, narrative, policy, and social mood that leads me to conclude we are on the cusp of change. This change dates back to Obama’s election in 2008 and has been gaining momentum ever since. Change that will continue to impact policy, markets, and society. It's not in me to bury my head in the sand in hopes that it will pass me by.
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