CAMS Weekly View from the Corner - Week ending 9/13/24
September 16, 2024
On a personal note if you asked me what has been the most dominating theme in the entire markets’ landscape relative to expectations in recent years without hesitation I would offer that housing prices were going to rollover for dead “anytime now.”
The problem with this - like many broad based expectations when it comes to markets of any stripe – is the expectation seemingly refuses to manifest into reality.
Importantly, this is not an edition where we are offering a solid stance that home prices will do X in coming weeks and months. Rather we are addressing the topic in that as the recent months and years have unfolded home prices simply are not diving lower as many have predicted.
On the collective expectation level down trending home prices reached a near certainty when the Fed began to raise interest rates in earnest. This actually did begin to unfold as we moved through 2022.
Then it ended nearly as quickly as it started when general financial conditions began to loosen notably as 2022 was closing out and we moved into 2023.
We shared within a few editions along the path addressing the notable easing in general financial conditions. We specifically drew attention to the Chicago Fed’s National Financial Conditions Index as a way to display a visual of what was unfolding with said conditions.
Via that measure we had glided to easier financial conditions than what we had seen when the Fed actually began to raise interest rates.
Interestingly, at the initial peak level of the Fed’s interest rate hikes these general financial conditions were not much tighter than what they had been at the outset of the Fed’s interest rate hiking campaign.
As an important note to keep in mind tightening general financial conditions is the aim of interest rate hiking campaigns.
Generally speaking, to keep this succinct, collective market participants across various markets did not believe the Fed had the fortitude to keep rates “higher for longer” (as the interest rate backdrop came to be described) nor that they would be able to do so without blowing up the financial system in light of the massive debt burdens strewn throughout the entire economic system.
With this collective market participants began to loosen conditions via their various market operations by moving in the direction of expected rate cuts long before the Fed even whispered such a view.
Adding fuel to this fire (of which we had shared quotes from Fed Chairman Powell along the timeline) the Chairman began to lighten his language and tone toward the “higher for longer” view relative to interest rates.
Essentially collective participants offered a “We knew it!” view via their then follow-on market actions of easing these general financial conditions even lower.
As we stand current day the aforementioned Chicago Fed’s Index is now solidly easier in financial conditions than it was at the outset of interest rate hikes back in early 2022.
We invite you to digest this fact so we offer it redundantly for contemplation: Rate hikes are meant to tighten financial conditions but current day, without a rate cut yet in place, said conditions are easier than they were when the Fed first began to hike rates. (Are we sure the price inflation backdrop is crossing the finish line?)
Just one of many examples that could be shared of collective market participants easing these conditions is the 15 Year Fixed Rate Mortgage Average in the United States. As updated last Thursday we see it is now at 5.27%. For perspective the high water mark for this reached just over 7% nearly one year ago.
This represents a reduction in this interest rate by 1 ¾% all while the Fed maintained “high interest rates” via their Fed Funds rate.
Collective market participants lowered this interest rate via their operations in the bond market by bidding up benchmark Treasury notes/bonds which in-turn reduced the yield (think interest rate) on those benchmark instruments.
Through this and other market operations said participants eased conditions all while the Fed did not touch their Fed Funds rate.
Housing Stocks
We have consistently offered within editions that collective market participants price assets today according to what they see (or think they see) down the timeline. We offer this as a succinct way to describe markets as discounting mechanisms.
Participants are obsessed with the future and today is only important relative to how it may impact their downstream views.
With this an obvious question arises in that do we in any capacity believe that said participants would bid up areas within the economic structure that they simultaneously believe will implode downstream? Obviously this is an absurd question.
Using the Dow Jones U.S. Home Construction Index (as a basket of home construction companies) we have noted in-house along this path of the now long expected housing setback that collective participants keep bidding these company shares higher on a trend basis. What gives?
Clearly they disagree with the view that the housing industry collectively is about to enter into some sort of a swan dive. Will they be proven correct?
This is impossible to answer as they are not infallible in their forward views but they have been correct thus far in this trend contrary to the broad consensus views on the topic/industry.
As an interesting historical add-on to this view if we rewind the clock circa early 2006 – a full two-plus years prior to the housing industry debacle – we note this same index had topped out and began a consistent downtrend all while broad consensus in the socioeconomic landscape were nearly screaming housing can never move lower.
On a personal note I recall writing and sharing this information with audiences back then as a heads up that all was not good with the consensus view on housing.
As can be expected when the collective psychology is deep in bubble economics the messages were never received well. Interestingly that in itself was an additional Tell that we had big problems coming down the pike. The masses were hypnotized if you will in bubble psychology. Historically that never works out well.
The above is the Dow Jones U.S. Home Construction Index dating back to late 2020 for some recent perspective.
Our blue trend line notes the solid and intact uptrend market participants have been producing with their consistent bidding up of these company shares. Our red circle notes the most recent activity where they have bid them up to a marginal all-time new high level.
As a point of interest our black down trend arrow (mid-chart) notes the behavior of this index when the aforementioned general financial conditions were tightening for the bulk of 2022.
As offered previously, upon financial conditions easing via participant’s market operations they also then began to bid up and put in a new strong uptrend in home construction companies. Needless to say this is not market pricing behavior for an industry that is expected to crash soon.
As offered at the outset of this edition we are not offering X forward view on the general housing storyline.
Our intention is to draw attention to what collective market participants have been and continue to do in bidding up housing shares and is not meant as any kind of investment advice. We are using the above as a tool to glean messaging from participants for this edition.
They have a track record of being spot on relative to consensus using our aforementioned 2006 period as an example as well as recent years.
Unlike pundits and talking heads offering X view these participants are deploying capital in expressing their views of which offers much financial pain if wrong unlike pundits merely offering opinions.
It is a classic setup yet again, using history as a guide, where consensus expectations for X to occur not only do not materialize but actually unfold in the near opposite direction. Time will tell her story.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
Comments