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NEWS & VIEWS

Tom L. Stringfellow, CFA®, CFP®, CPA, CIC | August 24 , 2020

The following has been compiled from information and comments provided by the investment professionals of Frost
Investment Advisors:

Rooftop Recovery…

Some mixed headlines last week included an increase in initial unemployment claims, comments from the Fed and the markets. However, the one particularly bright spot has been the housing markets.  Despite fears of a potential virus resurge or a stimulus breakdown, people are increasingly on the move.  The disappointing news of the uptick in the initial unemployment rolls was taken somewhat in stride by the markets, though, as investors bid up their tech-sector favorites over the week.  By Friday’s close, the NASDAQ pulled ahead of the S&P 500, with both indexes trading in record territory.  And considering the depths of the market pullback in March, the S&P recovery through last week, moving from the February 19th highs through the March 23rd lows, was itself a record-setting feat.  Even so, as we’ve noted on several occasions, the recovery so far has been less than uniform for all the companies in the index.  

Through last, week the Technology Select SPDR (XLK) was up on a year-to-date basis 28.6 percent, with the Consumer Discretionary SPDR (XLY) up 16.55 percent.  On the opposite end of the spectrum were financials (XLF) off -21.02 percent and energy (XLE) down -39.99 percent.  Meanwhile, the year-to-date returns for the S&P have returned to positive territory.  But for those who think certain sectors have gotten ahead of themselves, consider a few thoughts from Renaissance Macro Research which help put the market sector-specific rally in perspective:

*Rallies are primarily targeting business-evolution companies and industries. Companies not participating in the stay-at-home work and leisure shifts have not benefited from investor support.

In terms of the economic news for the week, the primary distractor was the already mentioned labor report.  Earlier estimates were guessing initial jobless claims for the week to be around 920,000 versus the actual 1.106 million in new claims filed.  Continuing claims were a little more positive, falling to 14.84 million from a prior 15.48 million.  This is still an astounding number of unemployed, but the number is continuing to trend lower, now sitting at its lowest level since early April.  Market worries are that perhaps the labor market recovery is beginning to stall with the uptick in new claims.   In the meantime, any continuing improvement in the re-employment of those laid off should be a tailwind for the economy.  A note of caution though:  Goldman Sachs published comments last week citing that up to one-quarter of those temporarily laid off employees may remain permanent pandemic casualties.

One commentary that did give investors pause (for a moment) came from the Fed,  citing continuing concerns about the pace of the economic recovery, especially in light of  the economic dependency on the virus progression, public response, vaccine development and the sustainability of businesses re-opening.  Add labor market concerns and the still-stymied next round of stimulus, and there is some uncertainty about what the Fed’s next course of action might be.  The timing of the Fed comments was appropriate, coinciding as it did with two regional Fed reports (Philadelphia and New York), both of which indicated a slip in new orders and shipments.  Next month, there should be some better input in tandem with the next FOMC meeting, though that will likely address future guidance in asset purchases, inflation expectations and its monetary policy strategies. Stay tuned.

Although we have seen some false starts and a zigzag recovery across the markets, consumer preferences and the employment lines, the stalwart throughout has continued to be the housing industry and its related businesses.  People are transitioning in record numbers, moving out of the cities, “upgrading” their home or adapting to changes related to working from home.  This has been the one consistent “V-shaped recovery” from the quarantine lows of March and April so far.  And, thanks to already low inventories and cheap mortgage rates (+/- 3 percent), home builder sentiment for August is at record highs, dating back to 1998, while buyer traffic is also at or near record highs. Looking back at July housing activity, building permits are up across the country (+18.8 percent), tying January highs earlier this year. Home sales also up +5.86 million, their highest level since December, 2006.  With the jump in both new and existing home sales, inventory levels have likewise fallen to less than a three-month supply.

In terms of housing markets and their economic impact, a number of factors should be considered, including pricing, demand and delinquencies.  The demand pickup has been readily visible over the past several months, which in-turn has bid up seller asking prices.  Consider data from the Mortgage Bankers Association (MBA), which has been tracking the recovery in prices, with the median U.S. house price rising from $284,600 in May to $295,300 in June.  Also, not unexpected, delinquencies have risen 3.7 percent from last year (biggest quarterly increase in the MBA survey history).  Over the past few months there has been a drop in 30-day delinquencies, is this perhaps an indication of a firming in home owner financial concerns? As to the economic impact of a firming and growing housing market, today two-thirds of households are owner occupied, something that historically has proven to be a substantial source of household wealth.  

The housing market accounts for a significant portion of all economic activity, including construction, and changes in the housing market can have broader effects on the economy.   Add a backdrop of rising home prices, and this usually spurs additional construction spending to take advantage of higher prices, which in-turn leads to more economic growth.  This effect is showing up in improving sales for a number of home improvement stores, along with a rise in lumber prices and growth in labor employment for construction and related crafts.  And while the economy has changed dramatically following the COVID-19 pandemic, consider that in 2018, spending on residential fixed investment accounted for about 3.3 percent of GDP, while spending on housing services accounted for another 11.6 percent of GDP.  Assuming some return to normalcy, homeowners may help jump-start the economy.
 

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