Inflation remained elevated in October with both Consumer and Producer core price indices increasing 0.3% from the prior month. As I consider potential post-election model adjustments, I focus on continuing increases in credit costs against the benefits of a more optimistic business environment.

Shaping my view on continuing credit normalization following several years of restrictive monetary policy, we see consumer delinquency rates rising across loan categories on a year over year basis. These increases are occurring despite the picture of a strong labor market created by the reported job gains in the Bureau of Labor Statistics Establishment surveys. The quarterly Federal Reserve Bank of New York report on Household Debt and Credit (November 13) found “3.5% of outstanding debt in some stage of delinquency.”

There are continuing signs of commercial borrower stress as well. S&P Global Market Intelligence reported (November 12) that through October, “U.S. bankruptcies in 2024 could reach the highest level in over a decade.” S&P Global MI counted 60 bankruptcy filings in October across public and selected private companies. As seen in the nearby chart, bankruptcies topped 700 in 2010 as the economy sluggishly emerged from the Great Financial Crisis. The year with the highest number since then was the 2020 lockdown year. At the current pace, the likelihood that 2024 finishes higher than 2020 is high.

The key question for investors is whether these credit trends will continue to worsen or are they nearing a peak. Future monetary policy, fiscal policy, regulatory environment and exogenous factor such as war and peace will all have impact on the answer. In my opinion, there is a certain amount of continuing decline that we should already expect simply from the long and variable lags of restrictive monetary policy.

In one of the first business surveys to be published that includes a collection period after November 5, the Federal Reserve Bank of New York’s Empire Manufacturing Survey (November 15) noted that “the headline general business conditions index shot up forty-three points to 31.2, its highest reading in nearly three years.” I have marked the reports graph of this data with a red dotted line to highlight the time since a similar previous reading. A potential change in the multi-year decline in national manufacturing trends would be a very welcome event.

Mid-Cap Banks

The mid-cap bank group gained 0.71% on average last week. The median group 2025 P/E is now 13.17x which is a 12.2% premium to the recent comparable period average P/E of 11.56x. The earnings yield spread (a modified version of equity risk premium) closed at a 30.36% premium to my assessment of neutral. The valuation estimate equates to a price premium of 14.87%.