It was a solid week for the equity markets with the S&P 500 settling well above the 4,000 level. After a rough start to the year, growth sectors kicked into gear this week while the bond bear market went on hold, at least temporarily. The economic recovery narrative is pretty firmly entrenched now. The recent ISM Services index hit an all-time high in March, and the manufacturing measure is at the highest level since 1983.
But the wall of worry is always there. In the U.S. we seem to be in a race between vaccination rates and the b117 COVID variant. Roughly a third of the population has received one dose in the U.S., which puts us only behind the U.K. and well ahead of Europe.
Of course, this means two-thirds still haven’t been inoculated. Add in the fact that the b117 variant appears to be much more infectious in the under 18 crowd while schools return to in-person instruction and you can’t help but look at the tick higher in cases a little sideways.
Michigan in particular appears to be the epicenter:
Time will tell if parts of the country are looking at another round of lockdowns before vaccination rates surpass 50% to 60% of the total population.
Housing – Bubble or No Bubble???
Housing seems to be going nuts again. As you can see below, home price appreciation is running at the highest level nationwide since late 2005 and early 2006.
More importantly, inventory levels are exceptionally low. On a national level there is only two months-worth of supply on the market, something we have never seen before.
Naturally, this brings up the bubble debate. Over at Calculated Risk he noted the key ingredients behind every bubble:
‘A bubble requires both overvaluation based on fundamentals and speculation. It is natural to focus on an asset’s fundamental value, but the real key for detecting a bubble is speculation … Speculation tends to chase appreciating assets, and then speculation begets more speculation, until finally, for some reason that will become obvious to all in hindsight, the “bubble” bursts.’
Homes might be overvalued today, but not to the extent they were in the housing bubble of 2006/2007. Prices to median incomes is high, but not crazy high given low rates.
We also aren’t seeing stupid signs of speculation, at least so far. It still takes pretty solid credit to buy a house today – the majority of buyers today have very solid credit scores, unlike the 2003 to 2007 period.
The market is unquestionably tight, in part because home building basically ground to a halt last year.
We also aren’t seeing the home flipping shows proliferate on T.V. like we did back during the bubble years. And Wall Street isn’t rolling out the esoteric mortgage linked securities. Again, the qualifier is not yet at least.
So, in the bubble vs. no bubble debate we’d come down on the side of no bubble. Millennials are only just starting to buy homes, and you have to think this will be a tailwind for some time. Could it become a bubble again? It’s certainly possible, but we aren’t there yet. But if it does, it would be the first time we will have seen a bubble in the same asset class within one generation. Usually, only mortality can erase the scars from prior bubbles!!!
Charts We Found Interesting
1. Over the past year Congress has authorized over $7 trillion in new spending and tax relief measures through six coronavirus relief laws. Much of it will be spent by the time 2021 comes to a close, but close to $2tn won’t be spent until 2022 or 2023. And of course, this is before the pending infrastructure legislation.
2. The Fed is making it very clear they won’t think about tightening policy until the labor market for low-and-middle income workers starts to heal. There’s a long way to go.
3. How big of a deal would a corporate tax hike be for S&P earnings? Goldman thinks roughly a 9% haircut.
4. It is worth keeping the long-term trend of corporate taxes in mind.
5. Coinbase could be the biggest IPO of the year. Their latest AUM numbers are off the charts!!
6. If you want the case for decelerating inflation this year, Lacy Hunt is the man (https://hoisington.com/pdf/HIM2021Q1NP.pdf). Basically, bank lending is the key behind inflation, and banks aren’t lending.
7. Bill Bryson on the difference between textbook advice and real-world reality:
Have a good weekend.
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