Quote of the Week

 “It is not how much we have, but how much we enjoy, that makes happiness.”

  • Charles Spurgeon

Tech Corner

Last week was a down week for the markets. The Dow was down -1.38%, the S&P 500 was down 3.31%, and the Nasdaq was down -5.61%. For the year the Nasdaq is down -32..58% and the S&P 500 is down -19.85%. The Dow which is made up of less risky stocks is down -9.33% for the year. The Nasdaq which is made up of the hot stocks from last year is down -17.7% since the beginning of 2021. The data is saying that this carnage is far from being over.

We are currently 92% cash and as of now nothing looks worth investing in. Although we don’t make predications, the current economic landscape doesn’t appear that it is going to change anytime soon.

It is important to understand one of the procurers of a downward spiral during recessionary times. Bank underwriting conditions can become self-reinforcing during times like we are now experiencing. Banks tighten credit in response to fear of loan losses. This tightening causes credit availability to fall, which slows the economy, and, in turn causes defaults. These defaults confirm banks’ suspicions of the risky environment and causes them to tighten further. This is how the underwriting pendulum moves from one end to the other.

The Federal Reserve released its October 2022 Senior Loan Officer Survey. This survey was conducted between September 26, 2022 and October 17, 2022, and reports on changes in domestic underwriting standards and loan demand, on a seasonally-adjusted basis, for commercial and consumer bank loans in the three months prior to the survey period. This period effectively corresponds to the third quarter of 2022.

A significant net percentage of banks tightened underwriting standards for commercial and industrial loans to large and medium firms.

Survey Highlights:

A major net percentage of banks tightened underwriting standards for Construction and land development.

Lending criteria for Government real estate home loans such as FHA loans remained basically unchanged. However a major net percentage of banks reported weaker demand for these loans which will have an effect on housing demand and will adversely affect the construction industry.

A moderate net percentage of banks tightened underwriting standards for credit card loans. Moreover, a moderate net percentage of banks reported stronger demand for credit card loans. This is not a good sign meaning more people are living off loans on their credit cards.

Regarding loans secured by automobiles, lending criteria remained basically unchanged, but a significant net percentage of banks reported weaker demand for auto loans.

Banks reported that they were less likely to approve credit card loan applications and auto loan applications for borrowers with a FICO scores less than 680.

What this means for the economy is that there is less credit being used or less credit available, thus less spending, thus a downward spiral in spending compounding on itself. All this points to a coming recession.

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These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.

The S&P 500 index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.

Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.

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