Thursday, May 19, 2022

Markets remain under pressure after weak retail earnings

Dow dropped another 390, decliners over advancers a mild 5-4 & NAZ went up 25.  The MLP index was off 2+ to the 205s & the REIT index fell 2+ to the 417s.  Junk bond funds saw some buying & Treasuries were bid higher while stocks were sold.  Oil slid lower in the 109s & gold  jumped 29 to 1845.

AMJ (Alerian MLP index tracking fund)

 

 

 




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Sales of previously owned homes in Apr fell to the lowest pace since the Covid pandemic started, according to the National Association of Retailers (NAR).  Existing-home sales declined 2.4% compared with Mar to a seasonally adjusted annualized rate of 5.6M.  Sales were 5.9% lower than in Apr 2021.  That is the slowest rate since Jun 2020, which was artificially slow since the economy was struggling with sweeping shutdowns due to the coronavirus.  This count represents closings during the month, so it reflects contracts likely signed in Feb & Mar, when mortgage rates were rising.  The average rate on the 30-year fixed mortgage started Feb at 3.66% & ended Mar at 4.78%, according to Mortgage News Daily.  It is now hovering around 5.45%.  “We are moving back to pre-pandemic sales activity, but I expect further declines,” said Lawrence Yun, chief economist for NAR, citing that rates are now higher than they were when these contracts were signed.  Not only were buyers contending with rising rates, but they saw very little relief in the shortage of homes for sale.  Inventory at the end of Apr stood at 1M homes for sale, which is down 10.4% from Apr 2021.  At the current sales pace that represents a 2.2-month supply.  Tight supply kept home prices higher, despite rising interest rates.  The median price of an existing home sold in Apr was $391K, the highest on record & an increase of 14.8% from a year ago.  That median is skewed higher because sales continue to be more robust on the higher end of the market, where the supply is more robust.  Sales of homes priced $100-250K fell 29% year over year, while sales of those priced $500=750K rose 19%.  Sales of homes priced over $1M rose 16% compared with a year ago.  Sales continued to be swift with the average home sitting on the market just 17 days before going under contract.  The all-cash sale remained high at 25% of all sales.  Investors made up 17% of sales & first-time buyers made up just 28%.  Historically, first-time buyers generally made up about 40% of the market.

Existing home sales fell in April to the lowest level since the start of the pandemic

Treasury yields fell, pushing prices higher, as investors continued to seek shelter in bonds from a steep sell-off in equities.  The yield on the benchmark 30-year Treasury bond moved 9 basis points lower to 2.983%.  Yields move inversely to prices & 1 basis point is equal to 0.01%.  The move in bonds comes as stock futures pointed to another downbeat session for stocks.  Traders also bolstered their bond holdings yesterday, as the Dow experienced its worst one-day drop since 2020.  Earnings updates from big-box retailers showed rising inflation was dragging on corp profits.  US weekly jobless claims came in at 218K last week, an increase of 21K claims from the previous week, according to the Labor Dept.

Treasury yields fall, prices climb as investors seek shelter from stock sell-off

Kansas City Federal Reserve Pres Esther George said that higher interest rates are needed now to bring down inflation & policymakers are not focused on the impact that is having on the stock market.  The central bank official noted that the Fed is looking to tighten financial conditions, of which equity markets are a component, in an effort to tamp down price increases running around their fastest pace in more than 40 years.  “I think what we’re looking for is the transmission of our policy through market’s understanding, and that tightening should be expected,” George added.  “So it’s not aimed at the equity markets in particular, but I think it is one of the avenues through which tighter financial conditions will emerge.”  The S&P 500 is teetering on the brink of a bear market, or a 20% plunge from its high.  Investors have grown nervous over both rising prices & the impact that a big jump in interest rates could have on corporate earnings & consumer behavior.  Earlier this month, the Fed approved a 50-basis-point rate hike & has indicated similar-sized increases are likely at its next few meetings.  George said “we need higher interest rates” but she's comfortable with the pace the Fed is moving at now & doesn't see the need for bigger moves, such as a 75-basis-point increase that some have suggested.  “Moving deliberately, making sure we stay on course to get some of those rate increases into the economy and then watch how that’s unfolding is going to be really the focus of my attention,” she continued.  “I think we’re good at 50 basis points right now, and I’d have to see something very different to say we need to go further than that.”  Despite her concern on inflation, George said other parts of the economy are performing well.  However, she said she has heard form business contacts & others in her region that consumers are beginning to change behavior due to higher prices.  She also said she's confident the Fed, which targets 2% inflation, can bring prices down thru rate hikes & reducing the $9T in asset holdings on its balance sheet.  “I think we’ll succeed in bringing down inflation, because we have the tools to do the heavy lifting on that as it relates to demand, and we do see financial conditions beginning to tighten,” she said.  “So I think that’s something we’ll have to watch carefully. It’s hard to know how much will be needed to make that happen given all the moving parts that we see in today’s economy.”

Fed’s Esther George said the focus now is fighting inflation, not stock prices

It looks like brave investors are nibbling in the stock market.  However everybody is very nervous & the chart below shows why.  Good news is hard to come by in these times.

Dow Jones Industrials

 






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