Category: Market Commentary

“There’s no place like home, there’s no place like home, there’s no place like home.” – Dorothy, The Wizard of Oz

 

“Manic Housing Market Needs a Calming Dose of Deregulation”. So headlined Bloomberg on June 1st. “An inflation storm is coming for the U.S. housing market.” Thus warned Marketwatch on June 26th. By now, most of us are aware that residential home prices are, and have been, heading higher, with the median sales price in May reaching $374,400 versus $317,100 a year earlier. Employing our recollection of Economics 101 many of us would assume rising prices are a result of higher demand. That would not be correct. Mortgage applications for new home purchases are at their lowest level since May 8th, 2020 and are down 20% from the end of last year. So, if rising demand does not explain rising prices, then it must be shrinking supply. Well, no. Supply is actually rising. The supply of existing homes for sale is at 5.1 months, a 50% increase since September of last year. Housing starts in May were 1, 572,000 versus an average rate of 1,200,000 in the three pre-pandemic years of 2017 to 2019.

Looking at median home prices on an inflation adjusted basis is perhaps the best way to understand just how extraordinary the rise in housing prices has been. At the start of 1960 it was $174,079, in 1980 $187,505 and 2000 $206,620. The low in the past ten years was February 2012’s $198,688. With the $374,400 figure for May home buyers are now paying 88% more than just over nine years previously. This may serve to explain the headline of a story posted by Reuters on June 23rd “U.S. new home sales tumble to one-year low as prices soar.” It may also explain the polar opposite perspectives of home builders and home buyers. A confidence index for homebuilders is at 81.0, down slightly from 90 in March but still at a thirty year high. Homebuyer’s though feel somewhat differently. At 74.0 it contrasts dramatically with the 108.0 in March of last year which had marked the prior thirty year low. So, to summarize, prices are at historical highs, demand is falling and supply is rising. Wondering which direction home prices may be heading?

Wishing to perpetuate our housing tale just a bit further, equity market investors may have felt they were holding a “full house”. The last five days of June saw consecutive rising prices. The month was the fifth in a row with higher prices and the 8.2% return for the S&P in Q2 was the fifth straight quarter with over 5% gains, the first time that has occurred since 1945! In the race towards new highs though, the market did exhibit signs of fatigue in June. Foreign developed markets were down 1%. Emerging markets were up 1%, small cap stocks +1/3% and mid cap stocks -1%. Five of the eleven S&P equity sectors were negative and Technology regained its leadership role rising 6.9%.

The leadership of the market had rotated last November favoring small cap stocks, value over growth and foreign performing in line with domestic. In March that leadership began to revert back to its prior sources and that is exhibited in the Q2 rates of return. The S&P returned 8.4% with mid cap +3.5% and small cap +4.3%. S&P value stocks are still outperforming growth stocks year to date 16.3% versus 14.3% but with growth’s +11.8% return for Q2 versus value’s +4.9% that gap has significantly narrowed. The year to date rise in interest rates was entirely contained in Q1 with AGG, a widely used index of returns on taxable investment grade bonds, +.83 for June, +1.77% for Q2 and -1.66% year to date. For 60/40 portfolios returns were 4% for the quarter and are now 8.6% year to date.

 

Mark H. Tekamp/July 6, 2021

“Not only is there but one way of doing things rightly, but there is only one way of seeing them, and that is, seeing the whole of them.” – John Ruskin

 

At 8:30 am on Wednesday, May 12th the U.S. Bureau of Labor Statistics issued its much anticipated news release of the latest Consumer Price Index number. “The Consumer Price Index …increased 0.8 percent in April…over the last 12 months the …index increased 4.2 percent…this is the largest 12 month increase since…September 2008.” The next day’s Wall Street Journal described the stock market’s reaction. “The Dow and the S&P 500 post their steepest three day decline in nearly seven months, while a sharp rise in consumer prices heightened concerns that interest rates could be headed higher.” The May 31st edition of Barron’s cover story headlined “10 Ways to Cash In on the Shortage of Just About Everything.”

Pulling open the curtains and looking at the details though we find a reality that is a bit more, shall we say, nuanced. At near 16 million 10% of the US labor force is currently receiving unemployment benefits, seven times their pre-COVID level. 444 thousand who were working LOST their jobs the week of May 15th, a level twice that of the averages of pre-pandemic levels. Though the opening of the economy has created shortages in some areas of our economy both retail and wholesale inventories INCREASED in April. Last month’s Citigroup Economic Surprise Index fell below 50 for the first time since June of last year indicating that more economic data is coming in below rather than above expectations. The University of Michigan Consumer Sentiment Survey DECLINED from 88.3 in March to 82.8 in April. The Cleveland FED’s Ten-Year Expected Inflation Index, which was at 1.58% prior to the release of the CPI figure, is now LOWER at 1.57% and the Atlanta Fed Wage Growth Tracker shows that expected wage gains which were at 3.4% in December have DECLINED to 3.2%. As for the fear of rising interest rates, the 10 Year US Treasury rate, which closed at 1.607% the day BEFORE the release of the CPI figure, found itself at the close of May 28th at 1.581%. 

The stock market has been accused of a lack of association with historical average valuations. The saga of the run to the stratosphere in the FAANGM stocks (Facebook, Amazon, Apple, Netflix, Google (aka Alphabet) and Microsoft) is well known to most investors. Indeed, the 642% return for those stocks since end of year 2012 in contrast to ONLY 140.2% for the S&P 500 excluding those companies, has led some to wonder whether this has been less of a bull market than a mania in certain stocks. Interestingly though, in recent months the arguably least overvalued areas of the market have acted as a magnet for investor’s capital. The growth and value components of the S&P 500 have created nearly identical returns in the past twelve months, 40%, but in the past seven months value is up 37%, half again greater than the 24.5% for growth. The seemingly perpetually under achieving Foreign developed markets have enjoyed returns equal to that of the S&P year to date and small cap stocks 23% returns thus far in 2021 are not far from double that of “the big boys” in the S&P 500.

The .66% return for the month of the S&P 500 hides pockets of significant strength in this market. Energy +6.6%, Financial +5.9% and Materials +4.8%, Foreign Developed Markets + 3.5% and the Eurozone’s +4.4%. Not too shabby. The 60/40 Equity/Fixed Income portfolio having returned 1.3% for the month (the Equity portion returning 1.4%) is now sitting (hopefully not resting!) on an 8.7% return year to date. That’s not too shabby either.

 

Mark H. Tekamp, June 1, 2021

“Contradictions do not exist. Whenever you think that you are facing a contradiction check your premises. You will find that one of them is wrong.” Ayn Rand from “Atlas Shrugged”

 

There it was on the front page of the April 30th edition of The New York Times. “U.S. Economy’s Strong Start Signals a Stellar Year.” One year ago, who would have thought that our journey through Covid would have led to unbridled economic optimism, predictions of accelerating growth and booming financial markets with the euphoria only slightly tempered by concerns about rising inflation and interest rates?

Like red flags to bulls investors certainly appear to be drawn to rising prices. The plurality of those expecting rising versus declining equity prices has risen from 8% in January to 22% in March and 64% in April. They are bearish though on the bond market with 65.2% expecting interest rates to rise and only 7.9% the reverse, the lowest since March 2019 and possibly not coincidentally prior to a 1% decline in rates the following four months. The prospect of higher mortgage rates though has not discouraged the public from its plans to purchase a home with that number now at 8.9%, the highest since April 2002. Nor have prospective buyers been dissuaded from those plans by the need to pay more for what they plan to purchase with the Case-Shiller home price index charging forwards at a 17.6% annualized rate the past five months through April, the highest rate since the 2003-2007 bull market run in residential real estate.

A more careful examination of the current state of our reality though may reveal a somewhat more complex state of affairs. 16.56 million of us are still receiving unemployment benefits, eight times their pre-pandemic level. Government benefits now represent a 28% share of personal income contrasting with 16% pre-pandemic. In the first quarter of this year wage and salary income rose by $156 billion, a mere one-fourteenth of the $2.25 trillion in transfer payments received in the quarter. Perhaps this explains the variance in the level of optimism in how we view our present and future. The Conference Board’s Consumer Confidence Index rose to 121.7, a significant improvement over the 109.0 level in March. (The pre-pandemic level was 132.6). Deconstructing that index though between its present and expectations (i.e., future) subcomponents, reveals future expectations declining to a five-month low. Finally, the shipments of durable goods (goods not for immediate consumption) have trended downwards on a quarter over quarter annualized rate from 33.1% in Q3 2020 to 18.3% in Q4, 10.3% in Q1 2021 and 1.8% in April.

Investors would have been hard pressed NOT to have made money in April. Looking over a list of fifty-eight indices only TWO were negative, India and Japan, both Covid related. The S&P was +5.29%. That pesky variance with the Dow Jones Industrial Average persists which was +2.69%. The November 2020 reversal of that year’s prior market leadership (Small Cap versus Large Cap, Value versus Growth, Energy versus Technology etc.) which showed signs of reversing last month persists with Growth +6.83% and Value +3.65%, Small Cap up only a third of the S&P rise at 1.85%, Foreign Developed Markets +2.95% and Emerging Markets +1.20%. Energy, up 31.7% for the year, was barely positive at +.7% and Technology, up 7.7% for the year (versus the S&P’s 12.0%) was +5.20%. The 60 (equity)/40 (fixed income & cash) portfolio returned 3% for the month and is now +7.3% year to date with the equity portion returning +4% for the month.

 

Mark H. Tekamp, May 2, 2021

“Europe is so well gardened that it resembles a work of art, a scientific theory, a neat metaphysical system. Man has re-created Europe in his own image.” – Aldous Huxley

For investors, Europe is not so much a place given up for lost as simply forgotten. And when not forgotten, the glimmerings of its continuing existence are likely to be reminders of the imperfections of the human experience. “In another locked down, disrupted Easter, a tired Italy can’t escape the virus.” So said The Washington Post. “German finance chief says Covid surge shows now is not the time to reopen economy.” That from CNBC. Describing the continent in its entirety CBS News headlined “New wave of coronavirus infections sweeps across Europe.” So life goes forwards in much of the world but in Europe seemingly it remains the same. Clearly not a good time to buy European stocks, right? And what if one owns them? Should they sell them?

Curiously though, the markets seem to be saying something entirely different. The Markit Manufacturing PMI indicator measures the rate of growth of the most cyclical of the economic sectors and so serves as a very good indicator of the trend for the remainder of the economy. In March there were six countries with a stronger PMI number than the US. Five were in Western Europe including #1 Germany and #4 Italy. The German number was the highest in twenty-five years and dramatically exceeded expectations. The European stock markets may be telling us that there is more where this is coming from. The Euro STOXX 50, a sort of Dow Jones Industrial Average for large European companies, has handily outperformed the S&P 500 year to date 6.74% versus 5.77%. The best performing European stock market of all? Italy, outperforming the S&P for the month 5.31% versus 4.24%.

Has anybody noticed the divergence in the performance of the Dow Jones Industrial Average versus that of the S&P 500 in recent months? The ten-year average returns for the two indices, 12.93% and 13.81%, and the five year returns of 15.85% and 16.23% are reasonably close to one another but this year to date is a bit of a different story. January’s -2.10% versus -1.01%, (S&P & DJIA) February’s 3.17% versus 2.76% and March’s 6.62% versus 4.24% result in a Q1 2021 return of the two indices of 7.76% for the DJIA and 5.77% for the S&P. Finally, in a revelation of the pursuit of reverse near symmetry, from January 4th through February 12th the S&P outperformed the DJIA 4.7% to 2.8% but from March 4th through March 29th the DJIA outperformed the S&P 4.6% to 3.0%. That would seem to be, as we say in the trade, statistically significant.

March, while one-third of the quarter, bore some distinguishing qualities very much its own. Small cap stocks (as measured by the Russell 2000) were up 1.39% for the month, one-third of that of the S&P, though returning 12.90% for the quarter, more than twice that of the S&P. In the large cap space value continued to outperformed growth 6.31% to 2.72% for March and 10.91% versus 2.22% for the quarter. Foreign stocks underperformed the US market (despite the strength of the European markets) with returns of 2.51% for the month and 3.99% for the quarter. The 60% equity 40% fixed income portfolio returned 4.39% for the quarter and 1.11% for the month with the equity portion of the returns (6.73% for the quarter and 2.76% for the month) being offset by the modest negative returns of the fixed income portion due to the rise in interest rates during the quarter.

 

Mark H. Tekamp; April 7, 2021

“I’ve looked at clouds from both sides now. From up and down and still somehow it’s cloud’s illusions I recall.” 

– Joni Mitchell, lyrics from “Both Sides Now”

Inflection points contain a quality uniquely their own. They provide the observer the ability to gaze upon both past and future simultaneously though with the act posing a risk of confusing one for the other! Certainly, the disconnect this month between the commentary of some market observers and its contrast to what investors observe in the returns in their portfolios reveals at least the possibility of the existence of alternative realities.

The Bloomberg story of February 25th “In a Flash, U.S. Yields Hit 1.6%, Wreaking Havoc in Markets” contained verbiage leaving the reader uncertain as to whether they were reading about a circus or a war. Supporting the former were words such as “catapulted”, “tumbled” and “soaring”. “Jarring spectacle”, “led the plunge”, “amid the carnage”, and “bond yields were exploding” though suggested the existence of something a bit more ominous. 

The grist for this particular mill of hyperbole is the interest rate on the Ten-Year US Treasury Bond which closed the month at 1.54%, a not insignificant increase from its level of 1.11% one month previously. Here it might be helpful to place that particular security upon a gurney and perform a bit of dissection. The stated interest rate, in this instance the aforementioned 1.54%, contains within that single number the presence of two. The “nominal” rate is the number referenced but there is a second number as well, the “real” or inflation adjusted rate. If expectations of future inflation rates have increased by more than .43% in the past month then the inflation adjusted rate is declining. If this is a sign that financial markets are starting to anticipate the reopening of the economy and a surge in economic activity, then this might be very good news. 

It is quite possible that an increasing disconnect exists between the increasing amount of sunlight likely to be present in our futures and the darkness of our experience of the now almost one-year journey through the pandemic. The opportunity for investors equals the distance between expectations and reality and this is a salve that should stimulate the pulses of the bullishly inclined. With the Federal Reserve promising not to raise interest rates this year and with the US Congress due to pass the Biden administration’s request for an additional $1.9 trillion in federal spending with $1.2 trillion to be spent this year, 6% of the US economy, the winds in the sails of economic growth are strong indeed.   

The judge whose verdict investors most care about of course are the returns of the financial markets themselves. Here the shift in market leadership which has been much in evidence since early November supports the sunny view of our current economic prospects. The index, named after Henry Varnum Poor, belied his surname by rising 2.8% for the month with the spread between value and growth continuing to wide as the value portion rose 6% for the month and is +4.3% for the year contrasting with growth’s -.04% and -.05% respectively. Energy stocks continue to race forwards with monthly returns of 21.4% and 26.2% year to date followed by Financials 9.4% and 6.9%. The equity share of the 60/40 portfolio contributed 3.8% to the portfolio’s 3% for the month and 3.4% year to date.

Mark H. Tekamp; February 27, 2021

“It can be easy to get swept up into catastrophizing the situation once your thoughts become negative…remind yourself that there are many other potential outcomes.” – Amy Morin

There have been six economic recessions in the United States in the past quarter century. Our most recent experience of economic tempest and tumult however, has been unique. Economic downturns result in the loss of jobs and thus a lowering of incomes. Not this time though. As of September 30, 2020 the income available to be spent by the American people INCREASED 7% year over year. Earnings through employment declined but not by as much the $2.2 trillion provided under the CARES Act signed into law on March 27, 2020.

Responding to the economic uncertainty created by the pandemic we dramatically increased our annual savings from $1.2 trillion as of September 30, 2019 to $2.5 trillion. We are currently saving 14.3% of our incomes, twice their pre-pandemic level. When we resume our normal lives, and the likely drawing down both the amount and the level of our savings to their pre-pandemic levels, more than $2.5 trillion or 12% of the current size of US GDP will be available as fuel to feed the fires of the US economy.

The financial markets seem to be anticipating this likelihood. US small company stocks, whose earnings are almost solely dependent upon the domestic economy, rose 31.3% in the 4th quarter of last year and 4.85% in January versus the S&P 500’s 13.82% and -1.02% respectively. CNBC on January 24th carried the following news item about global transportation. “Shipping costs have skyrocketed as desperate companies wait weeks for containers and pay premium rates to get them.” Following the stock markets meteoric rise in November, commodity prices have experienced dramatic increases. Since December 8th oil prices are up 15%, wheat prices 13%, corn prices 29% and pork prices (for those producers able to afford the cost of feeding them!) 16 ½%.

For investors, 2021 may well be a year that, while close in proximity to its predecessor, harbors within itself more differences than similarities. A booming economy creates competition for the financial markets in the deployment of capital because of increased opportunities for that capital to seek profits in the real economy. It may also be a year that represents a transition from the decades since the 1980’s to a rather different looking future where perhaps interest rates begin to exhibit a tendency to rise rather than fall and where inflation becomes something more than just a historical construct.

With all the talk of bubbles in recent days I thought it might be opportune to invest in Wrigley’s stock but unfortunately Warren Buffett bought the company in 2008. In thirty-eight years of employment in the financial services industry (I began my career at a VERY early age!) I’ve seen a great many things but one I’ve never seen is an event that many investors are anticipating. No, the stock market is NOT in bubble territory.

No, the stock market is not about to crater and no, GameStop stock doesn’t mean much of anything at all beyond its serving as a very interesting human interest story.

Investors portfolios hit the pause button In January. The last several days of the month separated investors from a point or two of profits and the typical 60/40 stock/bond portfolio was up some fraction of a percent. Small Company stocks were up almost 5% as mentioned above with Energy stocks +5% and Foreign Emerging Markets +3% but Large Company stocks and Foreign Developed Market stocks were exercises in break even. Meanwhile, in the real world, prepare for the good time’s ahead!

Mark H. Tekamp; February 1, 2021