Equity prices have rallied over the last month, led by the Dow Jones Industrial Average and its tilt towards value stocks. The Dow is down only 7% over the past year, while the growth-oriented Nasdaq Composite is down a whopping 29%. The S&P 500 remains in a technical downtrend, with a current price below a falling long-term moving average. However, even when the index was at its lows for the year, prices never fell beneath their pre-COVID highs.
Bonds yields have stabilized, and the 10-year Treasury yield is back below 4% following a shift in Fed policy expectations over the coming months. The year has still been a disappointment for bond investors, with the Aggregate US Bond index tracking for its worst performance on record.
The US Dollar just recorded one of its worst weeks in decades, providing a healthy tailwind to commodity prices. Precious metals have been particularly strong, with silver rising to its highest level since June, and gold erasing three months of losses in just a handful of trading days.
Focusing on the Fed
The Federal Reserve raised interest rates by 0.75% for the fourth consecutive meeting in November. In the days leading up to the meeting, market participants had begun pricing in a ‘Fed pivot’, or slower pace of hikes, starting with the December meeting. In his post-meeting press conference, Federal Reserve Chair Jerome Powell attempted to take a neutral approach regarding future policy actions.
He confirmed expectation that the Fed would likely discuss a slower pace of rate increases at the coming meetings. But those comments were offset when he lamented that inflation continues to run well above the Fed’s target, likely requiring a higher terminal Fed Funds rate than was anticipated in the FOMC’s most recent Summary of Economic Projections.
In addition, Powell said it was premature to begin discussing a pause in tightening. While historically there’s been considerable lag between decisions and the cumulative effect of policy actions, Powell believes that lag has shortened thanks to Fed communication efforts, and we still have some ways to go before price stability is achieved.
In the days after Powell’s comments, stock prices dipped, and interest rates rose. The move proved short-lived, though, as last week’s Consumer Price Index indicated that inflationary pressures in consumer goods continued to slow, and peak price growth may finally be in the rearview mirror.
Futures markets are now pricing in a 0.50% hike at the December meeting, and several FOMC members have vocally supported a deceleration as we approach their estimates of the appropriate terminal rate. Hope remains that they can wrangle inflation without pushing the economy into a broad, deep recession.
The Fed may yet avoid a broad economic recession, but the housing market is already in one. In the midst of a pandemic that confined Americans to their houses and ignited a work-from-home revolution, homeownership demand surged in the United States. But there weren’t nearly enough homes available to satisfy that demand. At the peak of the mania, the total inventory of existing homes available for sale would satisfy less than two months of demand, down from a pre-pandemic level of around four months.
That supply/demand mismatch fueled a 45% surge in the price of the median existing home in just two years, faster than the rise that preceded the Great Financial Crisis. But declining affordability has since brought demand to a screeching halt.
The average rate on a 30-year mortgage has risen from a 2021 low of 2.65% to over 7.00% in November.
On a median home price of nearly $400,000, that translates to roughly $1,000 in additional interest costs every month. Unsurprisingly, traffic of prospective home buyers – as reported by the National Association of Home Builders – has dropped from an all-time high to one of its lowest levels in a decade.
A Look at What’s Ahead
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