Markets, Policy and Housing Interplay

Despite robust earnings and a less severe monetary policy, markets experienced a downturn last week. In the U.S., the Dow Jones declined by 1.45%, the S&P 500 by 2.87%, and the NASDAQ by 4.35%. Within the S&P 500, Consumer Discretionary faced the largest drop at -5.84%, trailed by Real Estate (-4.67%) and Information Technology (-4.61%). Conversely, Energy and Consumer Staples saw gains at 2.98% and 1.68% respectively, while Health Care dropped slightly by 1.01%. Europe’s market fell by 4.13%, Japan’s Nikkei decreased by 3.8%, and China’s Hang Seng by 5.84%.

Fed Speak Moves Markets

Inflation and rate policies remain central to short-term market fluctuations. Federal Reserve Chairman Jerome Powell, expressed optimism about lowering inflation to 2% in his recent speech at the Economic Club of New York. Presently, the year-over-year inflation rate is approximately 3.7%. The Federal Reserve is confident that the prevailing monetary policy can successfully curb inflation, as recent trends indicate. Market analysts largely predict no rate hike in the upcoming November meeting, with a 40% probability of a 0.25% rate hike in December.

Powell emphasized the U.S. economy’s resilience amidst monetary tightening. This resilience is evidenced by promising corporate earnings, consumer spending, and a robust labor market. One contributing factor could be companies’ long-term debt arrangements, which remain unaffected by short-term lending rate changes.

Housing Market Insights

Most U.S. consumers benefit from protection against rising inflation, especially as newer entrants to the workforce higher salaries for entry level jobs. Furthermore, over 90% of U.S. homeowners possess fixed-rate mortgages. Redfin’s data reveals that 91.8% of these homeowners have mortgages with interest rates under 6%. This comfort seems to discourage homeowners from relocating, thereby maintaining elevated home prices due to the restricted supply. This trend might see a gradual shift as relocation becomes essential for job opportunities. However, this dynamic may differ globally, especially in regions like Canada, China, and parts of Europe, where variable rate mortgages prevail.

Drawing Conclusions

We appear to be nearing the end of increasing interest rates, with maybe one more increase to come. While inflation (the rising cost of goods and services) has been an issue, especially due to rising oil prices, it’s showing signs of settling down. High home prices are still a significant factor in this inflation, but we expect this to balance out eventually.

Because interest rates are likely near their peak, businesses will face challenges when they refinance their debt at these higher rates, which could affect their profits. Additionally, the Federal Reserve is continuing quantitative tightening (letting bonds on its balance sheet mature and not reinvesting the money into financial markets, reducing demand for those securities). We expect that this will be generally positive news for markets as most of the pain is behind us. We should see tight monetary policy to ease in the coming years. Labor and capital markets remain strong, with corporate earnings showing strong positive surprises. The big question we are trying to solve now is when to push out on duration for our fixed income securities.

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