Another rough week for the equity markets with high profile blowups at Netflix and Peloton. Speculative growth stocks in general were mauled again, but for the first time you started to see some of the generals crack as well (Apple, Google, Amazon, etc.). Trading volume in the QQQ, an ETF that tracks the NASDAQ 100 was off the charts on Friday. It traded $50bn today alone, a new record and about $15bn more than another other stock.
Some people were clearly panic selling Friday. Since November the NASDAQ has corrected over 13%, as you can see below.
While the correction feels painful, you only have to go back to February 2021 to find a similar decline. So, while the sell-off feels unusual at the index level, it’s still within the bounds of normal volatility. For example, if you look at a typical asset allocation portfolio (in this case DFA’s 60/40 global fund) it is down roughly 7% from the highs back in November. Looking at the drawdowns since 2004 this doesn’t stand out as particularly unusual.
But time will tell of course.
Housing – Another Supply Constrained Market
Little in terms of economic news explains the correction. It really all comes down to fear about how aggressive the Fed will be in hiking rates, and maybe a touch of Ukraine/Russia/geo-political angst. The main economic report this week was existing-home sales. They fell in December by a greater than expected -4.6%. You can sort of make out the dip in the chart below.
It’s not so much that demand is soft, but simply that there aren’t that many homes on the market. You can see below how inventory levels have changed over the last few years. Clearly there isn’t much out there.
Another way to measure inventory levels is to calculate how many months’ supply is on the market given current sales. That number todays stands at 1.8-months – a new low for this measure. It’s probably not much of an exaggeration to say that if a home is sitting on the market for long, it’s probably got something wrong with it (condition/price/location). Reasonable offerings are being snapped up.
Now higher mortgage rates are clearly going to be a headwind for housing this year. As you can see below, the typical 30-year mortgage rate has ticked up to roughly 3.5% – basically where they were pre-COVID.
But as the chart above shows, the recent move higher isn’t that material given the long-term view. While it may be hard to believe, home affordability remains reasonable today despite rising prices and higher rates. To quote Ken Shinoda, a portfolio manager at DoubleLine Funds:
“At the peak in the housing bubble in 2006, the median home price in the U.S. reached $230K with 30-year mortgage rates at 6.76%, assuming a 20% down payment. The monthly payment for that mortgage was $1,196 or 29.8% of the $4,070 in monthly income that household with two working persons generates at the median. Today housing prices are up over 53% with a median home price of $354K, but household income is up 40% and mortgage rates are cut in half at 3.47%. This implies a $1,204 monthly payment, 21.4% of today’s median monthly income of $5,627. Mortgage rates would have to almost double to revert to 2006 affordability. Long story short, housing affordability is still higher than historical averages of the 1980s and 1990s (28.1% of monthly income), when mortgage rates were much higher.”
Bill McBride at Calculated Risk puts together an affordability measure (more here). In the chart below, a lower number is more affordable. The basic message from this is that affordability is actually pretty reasonable nationwide.
Next week we get the much-anticipated Fed meeting on Tuesday and Wednesday. Expect a lot of volatility heading into the meeting and immediately afterwards. What to expect? This from J.P. Morgan captures general expectations:
“We expect the FOMC will use the statement released after next week’s meeting to signal the high likelihood of a rate hike at the subsequent meeting in mid-March. We also look for the Fed to continue to taper down asset purchases at the pace determined at the December meeting. There is a risk (we think perhaps one-in-four) that the Fed completely ceases purchasing assets in mid-February. The odds of a surprise rate hike next week look much smaller, in our view.”
Charts We Found Interesting
1. Nationwide, COVID number are still off the charts.
2. But maybe New York holds out some hope for a near-term peak.
3. Largest company in the S&P 500 year-by-year. It’s amazing how long General Motors dominated the index.
4. The number of cryptocurrencies in circulation. The exact opposite of supply constrained.
5. The yield curve’s track record over the last 50+ years in predicting recession (shaded vertical bars). It is 8 for 8 with no false signals … including getting the double-dip recessions in the early 1980s correct. But the lead time between inversion and the start of a recession varies by an enormous amount.
6. Just the 14th time since 2009 the S&P 500 has lost more than 5% in a single week.
7. Correlation doesn’t imply causation, but you have to wonder about the Taco Bell/Life Expectancy tradeoff.
Have a good weekend.
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