Interest Rates & Debt

Global interest rates have risen substantially over the past quarter. The US 10-year government bond yield stands at approximately 5.3% - a 24-year high - while the 30-year yield is around 5.7%, which directly impacts US mortgage rates. In Japan, their 10-Year government bond yield is at a 30-year high. In Canada, we have seen the Bank of Canada begin to raise interest rates – with four more interest rate increases expected over the next year. The key reasons for rising interest rates are the strong US economy, higher oil prices and the buildout of data centers, which are being financed by debt. For bond investors, higher interest rates present an opportunity to earn materially better income compared to recent years.

On the fiscal front, the US faces significant headwinds. The projected budget deficit is $2 trillion, with total US national debt reaching $41 trillion. Annual interest payments on this debt now exceed $1 trillion – which is more than the US spends on defense! Despite these concerning metrics, markets have remained relatively unfazed, largely due to a strong US economy driven by AI-related productivity gains and sustained consumer spending.

Mid-Term Elections

Early November midterm elections will determine control of the US House and Senate. Current odds suggest Democrats have a 90% probability of gaining the House and 65% probability of gaining the Senate. If the Democrats win both chambers, it is likely that President Trump will have a hard time getting much done over the next two years. From a stock market perspective, political gridlock may not necessarily be a bad thing. The illustration below shows that historically, markets have performed well in years following mid-term elections, especially when the President’s party loses both the House and the Senate.

AI

In 1965, Gordon Moore, one of Intel’s founders, observed that computing capacity had been doubling approximately every two years. This became known as Moore’s Law. Today, AI capacity is doubling every four to five months, approximately five times the pace of Moore's Law! This accelerated pace suggests transformative applications across virtually all industries. The healthcare and pharmaceutical industry represents a particularly compelling field. The illustration below shows that AI is leading to improvements in drug development timelines and efficiency. These advancements will hopefully lead to longer and healthier lives, while simultaneously creating investment opportunities.

Pearlstein Wealth Team

We are excited to share that Carmen had a beautiful baby girl, Madison! Carmen and Madison are doing very well. Also, we are happy to welcome the newest member of our team, Aldo Zemblaku. Welcome, Aldo!

Wishing everyone a happy fall.