Markets Find Some Footing As Investors Adapt to Higher Rates and Higher Inflation

October 28, 2022

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From the desk of Vance Howard:

The markets are trading in a much better mood than they have in the past few months, with the price action looking a bit more positive. There is room for optimism as it looks like the markets are trying to find a base. Despite seeing some big stocks such as Microsoft, Alphabet, Inc., and Meta taking a beating over the last few trading sessions, the indexes like the S&P 500 and Nasdaq 100 have held up well. If a major holding like Microsoft is way down, which is one of the largest holdings in each index, but the index is holding up somewhat firm, that is telling us that most of the other constituents of the index have hit a bottom and are not going down as they were earlier in the year. This is a very encouraging sign for the markets.

Are we calling a bottom? Of course not, but there are signs of improvement. Remember, bull markets come and go, and so do bear markets. We are more than halfway through this bear market, and I would even go as far as to say we are 75% through it. There is a mountain of cash on the sidelines to fuel the next bull market for an extended period of time, and we believe a new bull market could emerge in 2023. We do see higher interest rates and higher inflation, but investors are adapting to both. A recession is almost a given, but has the market priced that in already? There are still some big questions going forward, but after the last week or so, there is no doubt that a change is underfoot. Investors should be alert to what could be a turn in the short and intermediate-term trends, which might provide some opportunities.

New home sales fell 10.9% in September to a 603,000-unit annual rate, beating the consensus estimate of 593,000. The decline followed a 24.7% jump in the prior month which represented the fifth largest increase on record, as homebuyers hurried to lock in current mortgage rates ahead of more rate increases. More broadly, new home sales have been down in seven of the past nine months, as falling affordability has weighed on demand. Regionally, sales data was mixed, with sales rising in the Northeast and Midwest, but declining in the South and West. On a y/y basis, sales were down 17.6% and were also mixed by region.

The new home inventory picked up 1.1% to 462,000 units, the highest level since March 2008. Months’ available supply increased to 9.2 from 8.1 in the prior month. While the number of completed units in inventory continued to recover, it is still far below its pre-pandemic level. Homebuyers gobbled up completed units. The median number of months from completion to sale fell to a new record low of 1.5, which shows that demand is still solid in spite of the highest mortgage rates in two decades.

Median new home prices increased by 8.0% from the prior month to $470,600, while mean new home prices fell by 2.1%. Both are still running at elevated y/y rates, with increases of 13.3% and 15.0%, respectively, but off the peak rates earlier in this cycle.

Vance Howard

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