Four Items I'm Watching in Q4
We're down to the final quarter of the year and here's what's on my radar.
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Despite being historically, the worst month from an investment perspective, September turned out to be a stellar one for investors. Both the S&P 500 and Nasdaq advanced during the month, disregarding a clearly faltering employment picture and inflation still being significantly above the Fed’s target rate.
Second-quarter gross domestic product was revised up twice from its original estimate of 3% and ended up posting a solid 3.8% growth rate after a half percent contraction in the first quarter of 2025. The Atlanta Fed’s GDPNow last projection for Q3 growth that came out on Sept. 26 is modeling nearly 4% growth for the quarter just closed.
Unfortunately, economic growth is quite bifurcating. Most of it is driven by surge of tech spending on all things related to AI, including the construction of multi-billion-dollar AI data centers. The AI Revolution seems to have reached its hyperbole stage as an article by Wolf Street just highlighted. Large amounts of deficit spending have also contributed to economic growth. Something to remember as we go into another partial government shutdown. Defense spending got a 13% boost in the federal budget that goes into effect today and the military industrial complex has good tailwinds going forward.
Elsewhere in the economy there are myriad problems. Consumer sentiment is dismal, despite impressive retail sales growth over the summer. Both the residential and commercial real estate sectors are also struggling.
As we commence the fourth quarter, here are some watch items on my list:
- Despite robust headline GDP growth and weak dollar, oil fell by more than 5% in September and WTI is down some 15% for the year. Will we see a rebound in crude oil prices in Q4 or this a sign the overall economy is weaker than GDP numbers make it appear to be?
- I am also watching Federal Housing Administration mortgages. Extraordinary loss mitigation efforts that ran for nearly four years have largely now ended as a new federal fiscal year begins. There are nearly eight million of these mortgages on the market. They also require low down payments and are among the first to go underwater when the housing cycle turns as it has in many metro areas like Las Vegas and Austin. The delinquency rate even with these measures was above 10.5% at the end of the second quarter. I will be watching closely to see what kind of bump delinquency rates get as these policies are no longer in effect. The last thing the struggling housing market needs right now is a surge of foreclosures.
- The same goes for student loan delinquencies where nearly 13% of student loans are now seriously delinquent after the government restarted student loan payments and collection programs earlier this year. Approximately one in eight Americans has a student loan balance and nearly $1.8 trillion of student loan debt is outstanding. Millions will enter the wage garnishment stage soon, hardly a positive harbinger for consumer confidence.
- Ending on a brighter note, Merus N.V. (MRUS) was acquired earlier this week and was the third mid-cap biotech to be purchased with a significant buyout premium in the back half of September. I will be looking to see if this is just a blip or a sign of stepped-up mergers and acquisitions in the sector. Nothing triggers investor enthusiasm in this space as much as an increase in deal volume.
At the time of publication, Jensen was long MRUS.
