Stocks fell yesterday in response to rising bond yields as bond traders asserted themselves as the temporary speakers pro tempore of the capital markets. The housing market is not giving up, but it is markedly weaker than it was last year.
Build it and they will come. Bond traders are rejoicing the strong economy by… um, selling bonds. Higher yields are spooking stock traders, already sensitive over recent losses, global governments restricting popular growth companies, and less-than-strong earnings growth. Yesterday morning’s Housing Starts numbers showing a +7.0% month over month increase did not help the narrative of a strong economy, which only served to intensify yesterday’s selling.
I remember in the near wake of the Great Recession watching 2 things very closely. The weekly employment numbers and the housing market. I also kept a close eye on the emerging fracking industry, but that story is for another time. Going back to my fave 2, clearly, getting the economy back on its feet would take a turnaround in the Unemployment Rate which surged to 10% at its height in late 2009. Side note: it took until 2016 to get back to pre-recession levels. That said, the reason why the housing market was so important was less about the fact that it was a critical agent in the Global Financial Crisis disaster that accentuated the recession, and more about what a strong housing market means to the economy. I will not delve too deeply here but think about all the raw materials that go into a single-family home. Further, think about the amount of workers it takes to complete a home. Housing construction is a huge contributor to economic health, and its recovery was critical in reviving the economy.
The post-recession, low interest rate environment, engineered by the Fed, was a key driver for its post-crisis recovery. Low interest rates are critical for builders and buyers alike, so cheap loans were necessary to rekindle the fire after it was left smoldering following the market’s 2008 meltdown. And those low rates did more than just rekindle the market, they, in fact caused a raging blaze. Can you feel a chart coming? You have to check this out to get it. Just give a quick glimpse then keep reading.
On this chart, you should be able to see, pretty clearly, the steady, steep rise in new construction. If you look really closely, you can see that, while still growing, the trend seemed to stall a bit from late 2015 until late 2019. I will save you the hassle of thinking too hard about this and remind you that, that period of time was when the Fed was raising interest rates. The Fed cut interest rates in the second half of 2019, just prior to the pandemic. Can you see it now? Understandably, the numbers dropped at the beginning of the pandemic as a result of the lockdowns, but you can see how the numbers ratcheted higher starting in the second half of 2020… when interest rates were near 0%. The surge in Housing Starts would come to an end in April of 2022, EXACTLY 1 MONTH AFTER THE FED STARTED RAISING RATES. Now observe what happened after the peak. Can you see it? Clearly, higher interest rates affected construction of new homes. Ok, so builders, all their laborers, and suppliers are suffering, but what does that mean for the economy? Well, it depends on how you look at it. As an economist, you may assert that less wealth leads to less demand for goods and services, which will ultimately lead to lower inflation. But you may also assert that a slowdown in housing supply will cause prices of new homes to go up! Which they have… in case you haven’t noticed.
All of this will have to be worked out, unfortunately, before everything can return to normal. Yesterday’s read on these numbers showed some noticeable monthly growth, however, if you delve a bit deeper, you will notice that the numbers are lower than last year by nearly -8%. Regionally speaking, the Northeast is off by -21.7%, while the South is up by +16.0%. Finally, it was Multifamily (2+ units) that drove last month’s gains, up by +17.1%... after falling for the prior 3 months. Do, keep a close eye on housing numbers, they are a time proven telltale of what is to come.
WHAT’S SHAKIN’ IN THE PREMARKET
Netflix Inc (NFLX) shares are higher by +13.74% in the premarket. It announced that it beat on EPS and Revenues. More interesting to investors is that the company posted its largest quarterly subscriber growth in years, which it attributed to its crackdown on password sharing. That is not technically organic growth so be careful about drawing conclusions. The company also plans to raise prices, which has drawn cheers from investors. Oh, and Squid Game is coming back in fall/winter. Potential average analyst target upside: +34.0%.
Tesla Inc (TSLA) shares are lower by -7.36% in the premarket after it missed consensus estimates on RPS and Revenues. Musk also tempered future results talking about a “great ship” having challenges in “a storm.” Potential average analyst target upside: +3.5%.
ALSO, this morning: Fifth Third Bancorp, KeyCorp, Marsh & McLennan, Pool Corp, AT&T, and Watsco all beat on EPS and Revenues, while Truist, American Airlines, and Blackstone missed the mark.
YESTERDAY’S MARKETS
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