Market Recap
Investors were in holiday spirits this week with most markets posting decent gains. The economic data was a mixed bag (like it always is!!), but Fed Chairman Powell didn’t say anything too offensive mid-week, thus, triggering a buying rush.
The main event data wise was Friday’s payrolls report. Despite some high-profile layoffs in the tech sector, the underlying trend in job creation remains solid. The job market added a larger-than-expected 263,000 jobs in November, which was little changed from the prior three months’ 282,000 average monthly gain. The unemployment rate stayed stable at 3.7%.
In the rather perverse way Wall Street works, the focus at this point of the cycle isn’t really on the state of the jobs market itself, but more what it means for inflation and Fed policy. The data here points towards more rate hikes. The Fed has talked a fair amount about wanting to slow wage growth to aid in its battle with inflation. So far it isn’t working – wages were up 0.6% in November and are running at their highest level since late last year.
A half-point hike at the upcoming Fed meeting on December 14th is basically a lock now.
Housing – Falling Prices versus Tight Inventory
Housing in the U.S. is in a weird place. Affordability stinks given the run-up in home prices the last few years and mortgage rates just under 7%. Pricing from a payment perspective is the worst it’s been since at least 2006.
Prices are also falling. We found out this week that average home prices are down -3.3% from their peak levels. Not exactly a bear market, but a clear trend reversal.
On a month-over-month basis, prices were down the most in San Francisco (-2.2%), Phoenix (-2.1%) and Las Vegas (-2.1%). San Francisco has fallen 10.3% from the peak in May 2022.
But at the same time prices are dipping, sales are drying up. Sellers who don’t need to sell aren’t selling, and buyers are stepping to one side. Pending home sales are down a whopping -40% from year ago levels.
No two cycles are the same, and it is becoming apparent that this real estate cycle isn’t likely to mimic the 2005 to 2011 cycle for a couple reasons. First, real estate financing the last few years hasn’t been out to lunch like it was last time. Secondly, the supply dynamics are very different. For example, rental vacancy rates remain very low.
And in most markets there simply hasn’t been any building. Granted, the chart below is anecdotal, but it captures the idea. Building in LA county the last decade has essentially dried up. If you could overlay population growth on this chart it would be even more dramatic.
Chalk it up to what you will – regulatory restrictions, NIMBYism, whatever it may be. But the supply situation argues against a dramatic bust in residential real estate. Now this doesn’t mean prices don’t soften. And adjusted for inflation, we might not see real estate appreciation for years to come. But a repeat of 2005-2009 period seems unlikely.
Charts We Found Interesting
- Part of the bull case for the U.S. economy has been the huge stockpile of savings consumers are sitting on. Well, it should all be spent by the middle of next year.
- Ok, this isn’t a profound insight, but the difference between nominal and real inflation adjusted numbers becomes important when inflation is high. Take retail sales. The narrative is that consumer spending is holding up very well due to the savings glut. But the reality is that we aren’t buying more goods, we are just paying more for what we do buy.
- Value orientated strategies are having a pretty good year relative to their growth counterparts. Can it continue? If you look at relative valuations (top panels below), there’s more juice in the orange.
- Conversely, small-cap equities have been anything but a safe haven this year. But again, valuations actually look pretty interesting if we avoid a deep recession in 2023.
- But predictions about the future are hard!!! There’s a running joke that whatever Wall Street strategists predict for the upcoming year, you can almost guarantee something different happens. This was sure the case for 2022. And now look at them – after missing the markets by a miles this year, they are predicting modest losses in 2023.
- You mean to tell me Sam Bankman-Fried isn’t in jail yet? And he just spoke in front of the DealBook Summit? Feels like a ‘through the looking glass’ moment.
- All the ways land in the U.S. is used and/or owned. For example, 2 million acres is allocated to golf courses. Roughly the same is set aside to grow maple syrup. It’s stunning how much is set aside for cows and how little is simply not used at all.
Have a good weekend.
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