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When it comes to investing, most of us consider the markets to be made up of two types, buyers and sellers. More affectionately known as the bulls and bears. Bulls, those who believe the market will continue its winning ways, like to climb a wall of worry. In that case, there are numerous low to mid-level risks providing this bull with sturdy footholds. The housing economy went from moderate deceleration in January to severe softness in February. The global supply chain, already strained by semiconductor shortages, then had to deal with a true bottleneck: a ship wedged in the Suez Canal for six days. Toss in concerns about rising interest rates and a market that remains overvalued, and you have a recipe for the proverbial “wall of worry”.
The S&P 500 closed on 3/26/21 at a new all-time high, despite mounting economic and valuation concerns. Are those concerns valid? From our perspective, those concerns should not be overlooked, they are valid. No, that doesn’t mean we are throwing in the towel. There is a real opportunity to keep the recovery momentum intact. It might go something like this; the U.S. economy needs to execute a hand-off from the consumer-driven housing sector, which carried it through the pandemic, to the industrial-demand-driven manufacturing economy, which, as noted, is confronting multiple supply-chain challenges.
Housing Sector
Let’s talk about housing and the conditions affecting that sector. During the March 22-26 trading week, investors saw evidence the housing sector rally might be winding down. On the other hand, I don’t put a lot of faith in one month’s data. Still, it is worth watching two key housing-economy indicators which experienced moderate January declines with significant drops in February.
U.S. existing home sales in February declined by a greater-than-expected 6.6% from January, according to the National Association of Realtors (NAR). February’s seasonally adjusted annual rate of 6.22 million homes was 9.1% higher than in the pre-pandemic month of February 2020. Still, the February 2021 SAAR badly missed the consensus forecast of about 6.5 million.
Rising interest rates most certainly played a role. The 10-year Treasury yield rose more than 50 basis points, from 0.92% at the beginning of 2021 to 1.44% at the end of February. All things considered, we think the greatest detriment to real estate’s incredible run is scarce home supply. In fact, one of our clients in Charlotte NC, a 15-year veteran in real estate sales, provided some insight that supports the inventory challenge; a home that had not “officially” been listed had 27 showings on news of the upcoming listing.
The usual springtime pace never lost momentum nearly a year ago. That momentum turned into suburban homes being purchased well above the asking price. Accordingly, the supply of homes for sale in February 2021 was down 29.5% from the prior year, the largest trailing-12-month decline ever in this series. Approximately 1.03 million homes are available for sale – less than the roughly 1.45 million licensed realtors looking to sell those homes.
Affects Of COVID-19
Citing data as of 3/28/21, the CDC claims approximately 180 million vaccine doses had been distributed and 143 million had been administered. Because most of the administered vaccines are the two-shot solutions from Pfizer and Moderna, roughly 50 million Americans – about 15.5% of the U.S. population – have been fully vaccinated. Daily vaccinations are accelerating, recently reaching a 7-day average trend of 2.71 million doses in the penultimate week of March. And among the most vulnerable populations, meaning senior citizens and those with underlying medical conditions, vaccination rates top 80% in multiple states.
At the same time, daily infections have undergone a worrisome rise, as highly infectious new variants combine with spring break season. Hospitalizations have risen less than infections, suggesting that younger people are most likely the victims of new cases. This maddening trend risks pushing back the timeline for containing the disease, which likely will never be fully eliminated. April will not only be the busiest month so far for vaccinations; it will also include 1Q21 earnings, which are forecast to increase more than 20% annually. Conjectures abound when it comes to predicting stock market direction, therefore we focus on fundamentals and disciplines with long track records of success. If earnings are anywhere close to expectations, April could be a very forgiving month.
