As I typed this post yesterday (Monday) morning the stock market was set to open up a bit, which was surprising given news over the weekend of the US jumping into the most recent Middle East conflict with both feet.

As you’re no doubt aware, this past weekend we hit three of Iran’s nuclear facilities with 14 Massive Ordinance Penetrator bombs, or “bunker busters”. How much of an impact the strikes had on Iran’s nuclear program and what Iran’s response will be isn’t clear yet. Iran suggested it might block the Strait of Hormuz, but they hedged the statement with no major development since. The Strait sees 20% of the world’s petroleum consumption passing through daily, according to the US Energy Information Administration. Oil prices opened down about half a percent yesterday, a subdued response nearly as surprising as the ho-hum response of the stock market.

Again, this is an evolving situation that at least for the time being is having a muted market impact. Fast forward to the market close yesterday and major stock indexes had risen nearly 1%, even after news of Iranian escalation at midday. Read to the end and it’s no wonder why the market is so far brushing off the conflict.

I don’t want to get too far out of my lane in these posts, but here are a few paragraphs from an update I received yesterday morning from my research partners at Bespoke Investment Group. Bespoke does a lot really well and one of those things is providing objective context. Maybe this helps answer some of your questions, especially given the rise of near-apocalyptic stuff surfacing online.

From Bespoke…

It remains unclear how much effect the [US bombing] attack had. First, the International Atomic Energy Agency (IAEA) Director General said late last week that the ~400kg of highly enriched uranium (HEU) that was stored underground at the Isfahan facility hasn’t been seen by inspectors since a week before Israel launched its attacks. 400kg of HEU could be moved around in less than a dozen small sedans if necessary, so it’s entirely possible it was removed and dispersed early in the war; it also may still be sitting at Natanz and not have been damaged. There have been no major radiation signatures from the US or Israeli strikes on Iranian nuclear facilities, so that stockpile is unlikely to have been destroyed. Beyond that, the material damage to Iranian facilities is unclear at this point, especially given DoD damage assessments are incomplete. It’s possible that the strikes dealt a massive blow to Iran’s ability to enrich uranium and build a fission device, and it’s possible that the raid was all light and no heat. Only time will tell.

For the markets and global economy, the key question now is how Iran will respond. As-of this writing 36 hours after the strike, there had been no military response against US assets […] Iran’s military performance in response to Israel’s attacks has been abysmal, with very limited abilities to beat Israeli defenses using ballistic missiles and drones as well as abject failure at controlling its own airspace. While hitting back at US bases in the Persian Gulf would be much easier than striking Israel given the distances involved, the actual ability to do so from Iran is unclear. Similarly, it should be relatively easy for Iran to make the Strait of Hormuz basically impassable for civilian traffic, but given how badly they have failed to live up to expectations in other areas it wouldn’t be a surprise to learn they cannot. In addition to conventional military responses like strikes against US bases or closing Hormuz, unconventional responses are of course a possibility but not a likely one. Those would include stochastic attacks inside the US or the use of a “dirty bomb” (conventional explosives combined with enriched uranium or related byproducts to use radiation as a weapon rather than fission) against the US or Israel. Finally, it’s possible Iran is now in a “sprint” to a true nuclear weapon for use in response; this is also possible but would take at least a time of months if not longer to achieve based on their known capabilities.

In terms of likelihood, we view the stochastic attack/dirty bomb unconventional response as the least likely by far. While that approach is possible we don’t see it as easy to achieve or likely to stop attacks in Iran (if anything, the opposite) and therefore is very unlikely. Similarly, while achieving a fission bomb is certainly possible, doing so under a barrage from the sky would be very difficult; this outcome is more likely than the prior set but is still very unlikely by any measure. More conventional responses including closing Hormuz remain a possibility, but that would also impact Iran’s ability to export oil. On Sunday, Iran’s parliament reportedly endorsed a plan to close that vital oil supply line, but with the caveat that any decision to do so rests with Iran’s Supreme National Security Council.

[…] Global oil markets are of course fungible, but by far the largest destination for these [petroleum] flows is China. In other words, closing Hormuz would have the most direct negative impact on one of two countries most likely to back Iran in a war against the US and Israel. Both China and Iran’s other major power relationship (Russia) have condemned the attacks but otherwise stayed out of the war and we see little reason for that to change near-term. While there are risks of Iran lashing out globally in response to this war, a broader conflagration is not one.

Given Iran’s relatively weak capacity compared to expectations since the original strikes by Israel, we see a massive response against US bases or the Strait of Hormuz as less likely than not at this stage. It remains an open question whether Iran can execute that kind of response at all. We also see an American invasion of Iran as extremely unlikely by any measure. Polling is clear on this issue: bombing Iran is not popular (-19 net approval per YouGov) and a June 16 poll by that same outlet found a -44 margin for the idea of getting involved in the war at all. While opinion polling is not an inevitable driver of what happens next, the President’s coalition contains a range of non-interventionists and it’s a generally unpopular policy, both worth keeping in mind when mulling what happens next. In short, the odds of this conflict fizzling out are much higher than might meet the eye, even if there are a range of lower-probability risks that have much more negative outcomes.

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We’ve all seen how manic the stock market has been lately. A record high in mid-February followed by a slide and abrupt fall into what seemed like oblivion, then a rapid recovery. If you only looked at your investment performance selectively and somehow managed to avoid all news while on an African safari or something, you might wonder what all the hubbub was about.

We’re almost done with the first half of the year and have 2.5% year-to-date from the S&P 500 and 2% from bonds to show for it. That obviously masks a ton of volatility. By its April low the S&P 500 dropped 15% year-to-date before rallying 20% in less than two months – a huge positive reversal, but it could have been much worse.

Still, you might be wondering who was buying while “everybody” (according to the media at the time) seemed to be selling. It turns out that retail investors did much of the buying while institutional investors headed in the opposite direction.

During April the share of daily market transactions by individual retail investors shot to the highest point on record. This is interesting because market data shows that individuals sold stocks aggressively following the big tariff announcements on April 2^nd only to start slowly buying back throughout the rest of the month as concerns abated. I haven’t seen the numbers but this trend mostly continued in May given recent market performance.

But are retail investors getting ahead of themselves and might head for the hills at the first sign of trouble? Stock prices are high again and that means extra short-term downside risk, so while you should always have a long-term perspective, it’s especially true now. I’ve mentioned in other posts how retail investors are considered the “dumb money” by the institutional folks who humbly style themselves as the “smart money”. The two groups are marching to different tunes lately and only time will tell who’s right.

I think one point from the information below is that selling indiscriminately during a market panic and then spending the next few weeks buying back into stocks doesn’t make much sense. Investors would have been better off by doing nothing since markets recovered so quickly, but that’s Monday Morning Quarterbacking. It’s tough out there and sometimes you have to cry uncle. There should be no shame in that.

Anyway, I wanted to share some information that came in yesterday on this topic from JPMorgan and a few snippets from S&P Global. Nothing is actionable here, just some context on what’s been going on in the markets lately.

From S&P Global…

In the first week of April, as President Donald Trump announced higher tariffs on nearly all global trading partners, retail investors sold off more than a net $7.48 billion, and then bought a net $7.32 billion over the following three weeks as they tried to time the market's bottom, according to the latest S&P Global Market Intelligence data. […]

The initial selling, followed by three weeks of buying, tracked the broad movement of the market during April.

From JPMorgan…

The S&P 500 has erased its year-to-date losses, overcoming a nearly 20% drawdown. With it, valuations have vaulted to 21x forward earnings, well above the 30-year average valuation of 17x. Although April may have been the high-water mark for volatility in terms of intensity and magnitude, risks have been mitigated but not eliminated. Earnings growth expectations still sit at an unrealistic 9% y/y for 2025, despite an anticipated slowdown in growth and headwinds from higher tariffs. The 10-year Treasury yield seems to be hugging 4.5% with risks skewed to the upside, while the Fed remains in wait-and-see mode. This is still an environment marked by pervasive uncertainty. So what is driving the rally?

Perhaps the question is not what, but rather who, is driving the rally:

Retail investors – Since the announcement of reciprocal tariffs, retail investors have been virtually undeterred. Retail flows tracked by our investment bank, which include purchase of single stocks within the Russell 3000, options and a comprehensive selection of ETFs, revealed that retail investors bought net $36 billion in March and $40 billion in April – back-to-back records for largest monthly inflows. The share of retail participation in the market notched an all-time high on April 29, comprising 36% of order flow. For comparison, prior to the pandemic, the retail share of the market rarely breached 10%. Buying activity somewhat cooled in May but was still positive. Consumers have long engaged in retail therapy; retail investors appear to be buying the dip with a similar mentality.

Corporate buybacks – Companies have also been buying back stock at a near-record pace; April was the third-highest month for buybacks in well over a decade. As highlighted in the chart below, this is the strongest year-to-date start for buybacks since at least 2013. Not only does this signal that companies are confident in their long-term prospects at these price levels, but also could reflect the confluence of strong cash balances and uncertainty. Companies may have money to spend but are wary of making capital investments given policy uncertainty […]

Retail and corporate investors alike may be supporting the recent rally in markets, but high valuations have reasserted themselves and risks still linger. Therefore, investors should be well diversified and prepared for pockets of volatility throughout the rest of the year. 

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Good morning. I hope you and yours had an enjoyable Memorial Day. I took the day off so this quick note is my post for the week. I'll be back on schedule next Tuesday.

- Brandon

Good morning and Happy Tuesday! It’s another week with a ton going on in the world but let’s look at something from the WSJ in recent days about personal cybersecurity.

The article offered a warning to think twice before clicking on the standard “unsubscribe” link at the bottom of marketing emails we receive. If you’re inbox is like mine you’re getting at least several each day. Maybe a few are relevant but most aren’t even close and leave me wondering how this person or business even got my email address. I understand how that can work but receiving boatloads of unsolicited email is annoying. It’s nice to be able to remove myself from the sender’s list and I try to be diligent about unsubscribing. But now even that might not be safe anymore. It’s sort of a sad commentary on how much risk we unwittingly accept in trade for convenience.

The article says a recent study found that a small but meaningful portion of unsubscribe links were actually sending people to malicious sites for various fraudulent reasons. Sometimes the links are phishing attempts to test which email addresses have a live person on the other end. That person could be a good target for a social engineering scam and extortion. Yikes!

I’ll provide a link to the full article below but here are my notes.

“Trust is relative”, according to a cybersecurity expert quoted in the article. You might trust your email provider but then distrust a specific email. This might sound paranoid but a little paranoia goes a long way. Clicking on anything within an email, such as an unsubscribe link, takes you outside of your trusted email environment and into the wild west of the internet. Do you know the sender? Does the sender’s email address look valid when hovering over it with your cursor? Are there minor misspellings? The clues can be subtle.

Often an unsubscribe link takes you to a third-party site to finish the process. This can be legitimate but the third-party site shouldn’t ask you to log in – asking for your password is a red flag and experts suggest not doing it. Instead, close that page and go directly to the company’s site and log in if needed to update your marketing preferences.

While it’s possible for an unsubscribe link to expose your system to malware, apparently that’s less of an issue than your click confirming that a live person is on the other end of the email. I first heard of this problem years ago with robocalls – a real person picking up the phone makes your number more valuable and would often mean more calls from more companies, even if you told the original company to remove you from their list.

Beyond simply not clicking on anything anymore, which is a reasonable response but not very practical, experts suggest using tools built into your existing email to opt out within a header of some kind. This lets you unsubscribe without clicking on a link in the body of an email. That sounds good in theory but I don’t see that as an option in my Outlook. Gmail offers this so I’m guessing this capability is out there, just buried a bit. Third-party providers like Trimbox offer to make this process easier and help with security, but then you’re hooking them up to your email account which has its own risks, so you’ll want to do some due diligence.

Experts also suggest assigning an email sender to your junk folder, blocking the sender, or otherwise automatically shoving potential spam into a drawer and forgetting about it. You can also simply delete the email and then delete it entirely as a batch by emptying your trash folder every so often.

Beyond that, it’s possible to create and use multiple email addresses as some people might use a burner cell phone. Maybe one address for personal email, one for business, another for online subscriptions and one for financial transactions. Doing so helps compartmentalize email risk, again at least in theory. The problem with this approach is we already have enough miscellaneous stuff to manage and now we’d have to add multiple email accounts to the list?

Ultimately and unfortunately this is yet another thing to worry about when it comes to leveraging technology. Risk is everywhere but addressing it doesn’t have to be overly complicated. Just be extra careful, even a little paranoid, when working within your email and be mindful of what you’re clicking on. Mistakes can still happen but they’ll be much less likely.

Here’s a link to the article. Let me know if you hit the WSJ paywall and I can send it to you from my account.

https://www.wsj.com/tech/cybersecurity/unsubscribe-email-security-38b40abf?mod=trending_now_news_2

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This week let’s look at a couple of important issues getting some press lately: rising student loan delinquencies and the decreasing affordability of home ownership. Both aren’t necessarily new problems but both keep getting worse.

Student loan repayment was mostly paused early in the pandemic and became a political football in the years since. Understandably, millions of borrowers stopped paying on their loans back then and got used to it. This forbearance ended over a year ago with a one-year “onramp” allowing borrowers time to restart making payments without having late payments hit their credit report.

That onramp ended last October and now we see reports for the first quarter of 2025 showing that about a quarter of borrowers who were required to make payments were behind during Q1. This means, among other things, that these borrowers are seeing big declines in their credit scores.

According to a report by the NY Fed, most newly delinquent borrowers already had poor credit, with scores lower than 620. But a big chunk of borrowers, about 36%, had decent scores in the 620-719 range. Unfortunately both groups saw large credit score declines that rose the higher a borrower’s score was before becoming delinquent. Those 620-719 borrowers, for example, saw an average decline of 140 points – something that has real-world implications like dropping them into subprime auto loan territory and takes a few months to a few years to recover from. The report also said most delinquent borrowers are in the south and over age 40, and more older borrowers were seriously past due at 90+ days, so they’re having a tough time.

Making matters worse for seriously delinquent borrowers is that the US Dept of Education and the US Treasury have restarted the collection process this month. This includes garnishing wages, Social Security payments, even claiming would-be tax refunds.

If you or someone you know is in this predicament, one idea is to look at your retirement savings or other investments (assuming these exist) for cash to help pay off or pay down student loan debt. Maybe you’re out of work or your taxable income is otherwise a lot lower than normal. You’ll want to talk with a tax person as well, but you could take a distribution from your account, pay the tax and perhaps also a penalty. This would hurt your savings but taking the hit might ultimately be better than paying excess interest and continuing to damage your credit score. You could also look at consolidating your debt somewhere, but that can be a nonstarter if you’re already having trouble making your payments.

Okay, the second item is the affordability of home ownership. Home ownership peaked nationally at almost 70% of the population in 2004 but the average since at least 1960 is still over 60%. It’s about 55% in California and 75% in less expensive states like South Carolina, according to the US Census Bureau. Still, affordability is at a 35-year low across the country.

Inventory is low compared to population growth so prices are high. According to JPMorgan and Zillow, nationally we have a shortage of roughly 4.5 million homes based on population growth. That sounds funny when compared to news stories about the housing market slowing down lately due to rising inventory, but it’s different perspectives covering different timeframes.

Mortgage rates are at about the long-term average of 7% but still seem expensive compared to recent history. Underwriting standards are stringent, with about $110,000 of annual income needed to qualify to buy the average home in most states, according to a report from Bankrate. Add that to higher purchase prices and private mortgage insurance on first-time homebuyer programs and home ownership can be prohibitively expensive, especially for first-timers.

Among other things, this means buyers have to be a lot more established and usually older before the dream of home ownership can become reality. The following chart from JPMorgan shows this increase over time.

Reading about this reminded me of when my girlfriend (and long since my wife) and I bought our first house in the late-90’s at age 19, well below the average at the time shown in the chart and half of what it is currently. I think we put down 3-5% on an old bungalow in Sonoma, CA that may not have had any right angles in it. Our loan was part of an FHA first-time homebuyer program. I recall our interest rate being 7.5% and, plus the private mortgage insurance and other monthly costs, we barely scraped by. Still, we loved being homeowners. We did a ton of repairs on our own, learned from mistakes, and eventually sold the house to start the typical move-up process. We’ve benefitted from being owners versus renters over three decades but earned every penny through sacrifice and stress.

There are many financial planning issues related to home ownership but I’ll close with the thought that home ownership isn’t for everyone and doesn’t have to be. Some people will never afford to own a home and others might simply prefer not to. It’s just kind of sad that homeownership seems to be out of reach for so many.

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You may have heard over the weekend that Moody’s, one of our country’s three main investment-related credit rating agencies, downgraded the US to one step below AAA. S&P was the first to downgrade us back in the summer of 2011, then came Fitch in 2023 and now Moody’s. We’ve completed the set, so to speak.

While S&P’s downgrade shook the markets back in 2011, the reaction this time is more of a yawn; it’s newsworthy but not necessarily news because it confirmed what most already understand to be true. The US is on a long-term unsustainable debt path but we’re still the “cleanest dirty shirt” in the laundry basket of western economies, as was said back in 2011. We’re growing, have good structure, and our currency is likely to remain the most trusted for the foreseeable future. All that and more is probably why the markets have mostly shrugged off the Moody’s announcement.

Still, some of the details and analysis since Friday are interesting, and perhaps a little soothing given some of the headlines in recent months, so I’m reproducing snippets from Moody’s and my research partners at Bespoke Investment Group.

From the Moody’s press release – a link to the full document is below [emphasis mine].

Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration. Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government's debt and interest burden higher. The US' fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.

The stable outlook reflects balanced risks at Aa1. The US retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the US dollar as global reserve currency. In addition, while recent months have been characterized by a degree of policy uncertainty, we expect that the US will continue its long history of very effective monetary policy led by an independent Federal Reserve. The stable outlook also takes into account institutional features, including the constitutional separation of powers among the three branches of government that contributes to policy effectiveness over time and is relatively insensitive to events over a short period. While these institutional arrangements can be tested at times, we expect them to remain strong and resilient.

While we recognize the US' significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics.

A significantly faster and larger deterioration in fiscal metrics than we currently expect would weigh on the rating.  A rapid move out of dollar assets by global investors could precipitate such a deterioration if it resulted in much higher interest rates, causing the interest burden to rise faster than we currently expect. We do not consider this to be a likely scenario since a credible alternative to the US dollar as global reserve currency is not readily apparent.

And now some analysis from Bespoke.

Just after the close on Friday, Moody’s downgraded the US from Aaa to its next-highest rating, marking the third time since 2011 a major ratings agency has removed the AAA (or equivalent) from US sovereign debt. The new Aa1 rating is still extremely high in the scheme of things, and the sort of downgrade that would force sales of UST by existing holders [such as pension funds and others who are required by their own investment policy to buy AAA-rated bonds] would require a far larger cut to ratings. That’s not on the horizon. Moody’s had previously had the US on credit watch negative but has shifted that outlook to stable.

Back in 2011, S&P originally removed the AAA rating for US credit over risks that the US would not actually pay its bills and a default might take place if the debt ceiling was not extended by Congress. This sort of ratings downgrade makes some sense at the margin. Debt ceiling brinksmanship is messy enough that it’s not hard to imagine a scenario where Congress doesn’t raise the debt ceiling by accident or a day late, and Treasury refuses to make payments on debt due thanks to this cap. While that scenario’s likelihood is very low, we think it is materially higher than one where the payment of debt in US dollars is threatened, either by strategic default or because cash is not available to meet outstanding obligations.

US federal debt is denominated in dollars, and the issuer of that debt also issues dollars. To be sure, schemes like monetizing the debt (the Federal Reserve issuing new reserves to fund purchases of bills or UST when the market won’t buy them) would hypothetically have huge negative effects. But they’re always an option making the possibility that fundamentals like debt-to-GDP or the fiscal deficit would drive a US default basically zero. Despite that dynamic, Moody’s cited those two ratios among others as the key drivers of concern that led to the downgrade on Friday, which is a bit confusing.

Here’s a link to the Moody’s press release if you’re interested.

https://ratings.moodys.com/ratings-news/443154

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