Stocks snapped a 4-day losing streak yesterday erasing earlier gains even as Japan sent signs that it may abandon its signature Negative Interest Rate Policy / NIRP. The housing market is in a shambles and no one should be surprised as it is in the Fed’s crosshairs.
Housebroken. Here we are in the final days before Christmas and a would-be Santa Claus rally appears to have been pushed off course by none other than the Fed and its foreign central bank cousins. The hoped-for Santa Rally appeared to be cancelled when the Fed Chair came out swinging after the FOMC’s last meeting in which it raised rates by +50 basis points. It was clear that Powell did not want the markets to view the smaller-than-recent rate hike as a positive thing. After all, inflation is far from over. He admitted that “tough times” may be ahead with higher unemployment and a weaker economy. Isn’t that exactly what the Fed wants? Isn’t that exactly what the Fed is engineering with its tight monetary policy and trash-talk? Unfortunately, my friends, the answer to both those questions is yes.
It seems like just yesterday when I was watching the housing market very carefully in the wake of the GFC (that’s how we now refer to The Global Financial Crisis). The US was on the verge of a recession, like a normal recession, but unfortunately there was a massive housing bubble that was formed by poor lending practices and some misbehavior by a number of banking institutions… ah, let’s just say it… some Wall Street firms. Be that as it may, the housing market was booming and there wasn’t enough to go around. I recall a point where almost half of the parents on my son’s soccer team gave up solid professions to become mortgage brokers. The handwriting was on the wall, and it was even clear to the participants. Unfortunately, there was only one way for it to end and it happened without the help of the Fed. The bubble burst bringing down with it Wall Street fixtures and individual investors alike, not to mention the US economy which went from a run-of-the-mill recession into The Great Recession. You know when a recession gets its own name, it’s a big one.
Picking up the pieces was not easy. That required the handywork of the Government and yes, the Fed. It was the first time that the US had adopted ZIRP, Zero interest rate policy, but that was not enough. The Fed, for the first time, used quantitative easing, or QE to get even more liquidity into the banking system. Congress used its TARP program to bail out large, struggling businesses, and for the first time, we heard the term “too big to fail.” It was a challenge, but the US economy made it through. Interest rates would stay pegged at 0% until 2015 and the housing market was well on its way to recovery. That is why we watch the housing market so carefully. Not only was it one of the key causes of the recession, but it was one of the key drivers of the recovery. “What,” you exclaim, “that makes no sense, Mark!” Sure, it does. The housing market employs many workers, utilizes many services, and requires lots of natural resources. New homes need new furniture, new televisions, internet service, security, insurance, etc. Why not add a second car, now that you have a garage? Check out the following chart of Housing Starts, tracked by the Census Bureau. You can see it peaking in 2006 and rapidly declining into 2007, followed by the recession. You will note that it regained ground only to level off in 2015. The Pandemic would throw the market into high gear and take it to fresh heights. Interest rates were back to zero and mortgage rates were at record lows. Another bubble was being formed, and the “handwriting was on the wall,” to quote myself from the last paragraph. But this bubble was very different. You will note that while the peak was formed earlier this year, it was nowhere near where it was in 2006. In fact, you will note that the peak was right around the plateau that formed through much of the 90s and early aughts. In other words, the housing market never fully recovered in the wake of the GFC!
What can we learn from this chart? Well, foremost, if a newly formed housing bubble has, indeed, popped, a recession may be in the offing within the next year, if we use the last bubble as a reference. We also know that there may be short supply of housing, which will only serve to keep housing costs high. Shelter costs are a big driver of the current inflationary environment. With a tight labor market and many millennials seeking their first homes, this may continue to keep prices elevated… despite high mortgage rates. This is surely on the mind of the Fed and quite possibly why it is so keen on reminding us that interest rates are going to remain high. Housing starts are still around +50% higher than they were at the beginning of The Great Recession, meaning the pop may not be done… popping.
WHAT’S SHAKIN’
Nike Inc (NKE) shares are higher by +12.14% in the premarket after it announced that it beat EPS and Revenue estimates by +31.12% and +5.89% respectively. Dividend yield: 1.26%. Potential average analyst target upside: +17.3%.
FedEx Inc (FDX) shares are higher by +4.78% in the premarket after it announced an EPS beat. The company attributed the success to cost cutting measures which offset weaker demand for services. Dividend yield: 2.79%. Potential average analyst target upside: +16.9%.
YESTERDAY’S MARKETS
Stocks rose yesterday after 4 days of negative closes as investors found some hope the Santa Claus Rally may come to town, after all. The S&P500 ticked higher by +0.10%, the Dow Jones Industrial Average climbed by +0.28%, the Nasdaq Composite squeaked a +0.01% gain, and the Russell 2000 Index advanced by +0.54%. Bonds declined and 10-year Treasury Note yields added +9 basis points to 3.68%. Cryptos traded higher and Bitcoin climbed by +1.78%.
NEXT UP