HI Market View Commentary 01-23-2023
IF you miss a commentary head to www.myhurleyinvesment.com
IF you have a question that you would like me to go over in class email, text me, call me 888-287-1030
Why is the market going up right now?
IT shouldn’t be
New money the beginning of the year moved market higher than Simple Moving Averages = Technical Bounce
What is going on with China?
COVID, they are broke, and they have had the worst GDP numbers in 20 year-ish
Opening up the second largest world economy is harder than you think
Common sense says: Blue chip stocks or fundamentally sound stocks that got hammered last year have huge rebounding potential
AAPL, BA, BAC, BIDU, DIS, F, LMT, META, MU, SQ, VZ, UAA,
Market can get wrong, we make money on puts, convert that cash to more shares for an exponential return on the way back up
What about earnings – Proof in the pudding = For bullish movement you need three things:
Up day in the market
Meet top and bottom line
Guidance has to be yearly positive or raised
Why was Existing Home Sales good and New Home Sales expected to be bad ?
Locking in a lower mortgage rate, Nobody really buys during Christmas
AAPL – 2/02 AMC
BA – 1/25 BMO
BAC – 1/13 BM0
BIDU – 3/01
DIS – 2/08 AMC
F – 2/02 AMC
GOOGL – 2/02 AMC
JPM – 1/13 BMO
LMT – 1/24 BMO
META – 2/01 AMC
MU – 3/29
SQ – 2/23 AMC
UAA – 2/02
USB – 1/25 BMO
V – 1/26 AMC
VZ – 1/24 BMO
The Big Picture
Last Updated: 12-Jan-23 15:36 ET | Archive
Earnings are the crux of the market matter in 2023
The losses the stock market suffered in 2022 had a lot to do with the Federal Reserve raising interest rates. The thinking was that the higher rates would adversely impact economic growth, and, consequently, earnings growth.
With earnings prospects in question, equity valuations were also called into question and the universal judgment was that stocks were overvalued. That judgment sentenced stocks to a lot of selling pressure — some more than others — and led to the stock market’s worst performance since 2008.
The initial struggles in 2022 were rooted in the understanding that the Fed’s easy monetary policy was ending. In effect, the reality hit home that the party seen in 2021 was over, animal spirits would be killed, and valuations would matter again.
As 2022 progressed, though, the forward-looking stock market wasn’t concerned so much with how much earnings growth would slow in 2022 as it was with how much earnings growth would slow in 2023.
With the fourth quarter earnings reporting period unfolding over the next several weeks, we will soon have some answers.
We don’t want to say that the fourth quarter results are inconsequential, yet they will take a distant backseat to the guidance that accompanies the fourth quarter reports.
Not all companies issue specific guidance, but with concerns about a possible recession in 2023 running high, qualitative remarks about the demand outlook will resonate as much as any quantitative guidance that is provided.
Overall, S&P 500 earnings were expected as of January 6 to decline 4.1% year-over-year, according to FactSet. The blended growth rate, which accounts for companies that have reported and estimates for companies that have not, currently stands at -4.8%.
We know from FactSet that analysts were slashing their fourth quarter earnings estimates in front of the reporting period. Analysts typically cut their estimates as a quarter progresses, but this year the cuts were larger than usual.
The fourth quarter bottom-up EPS estimate decreased by 6.5% between September 30 and December 31. During the past five years, the average decline in the bottom-up EPS estimate during a quarter has been 2.5%, according to FactSet.
What the market knows going into the reports, then, is that the earnings bar has been lowered quite a bit, making it easier per chance for companies to report better-than-expected fourth quarter results.
The banks will get things going on the earnings reporting front. They don’t provide specific EPS or revenue guidance, but they generally have plenty to say about what they are seeing in terms of loan demand, credit quality trends, and general economic conditions.
Market participants will be paying close attention to what the banks are saying about credit quality and what they are accounting for in terms of loan loss reserves relative to their loan base. The banks will set the tone early with respect to the market’s understanding of economic conditions before giving way to the industrial, consumer staples, consumer discretionary, and technology companies that typically provide specific EPS and/or revenue guidance.
One issue yet to be settled is how confident companies will be projecting full-year guidance. The degree of confidence, we suppose, will be reflected in the width of guidance ranges.
In any case, we also know from FactSet that earnings estimates for calendar 2023 have been cut from just north of $250.00 in the middle of 2022 to $228.28 today. The latter represents an expected 4.9% increase over the calendar 2022 estimate of $217.73, which has also come down markedly since the middle of 2022.
What It All Means
These estimates are the crux of the market matter as we move into 2023. Currently, the S&P 500 trades at 17.5x calendar 2023 estimates, which can be looked upon at this juncture as forward 12-month estimates. The 10-yr historical average is 17.2.
The inference is that the market is trading at a slight premium to its historical average multiple before the economy is feeling the brunt of the Fed’s rate hikes. To that end, the Atlanta Fed GDPNow model estimates Q4 real GDP growth will be 4.1% on an annualized basis.
The downward revision to 2023 earnings estimates, though, reflects an understanding that the long and variable lags of the Fed’s rate hikes will take more of a toll as 2023 progresses, particularly since the Fed seems intent on wanting to see more weakness in the labor market.
The deeply inverted yield curve suggests there will be some notable economic weakness in the future, the timing and severity of which remain open for debate. The severity factor ranges from little growth to a mild recession (i.e., a soft landing) to a full-blown recession (i.e., a hard landing).
An environment of little growth would fit within the confines of the current calendar 2023 earnings estimate. In that case, one could say the market is fairly valued at its current level.
If there is a mild recession, earnings would presumably decline 1-10% from 2022, leaving the market somewhat overvalued at its current level.
And if there is a hard landing, earnings would presumably decline more than 10% from 2022, leaving the market decidedly overvalued at its current level.
There is a lot riding on the fourth quarter earnings reporting period. Market participants will start to understand if the cut to 2023 earnings estimates since the middle of 2022 is just right, too much, or not enough.
Regardless, there will be valuation constraints in 2023 because 2022 taught everyone again that valuation matters.
We are not starting 2023 with an earnings multiple that is too high or too low. We are starting just above average in front of an earnings reporting period that is expected to be below average and with an economy that is expected to weaken noticeably, meaning multiple expansion and big gains this year won’t be easy to achieve at the index level if the earnings guidance surprises are more negative than positive.
|WEEK OF JAN. 16 THROUGH JAN. 20, 2023|
|The S&P 500 index lost 0.7% last week — the first such decline of 2023 — as lackluster Q4 earnings results contributed to investors’ recession fears.
The market benchmark ended Friday’s session at 3,972.61, down from last Friday’s closing level of 3,999.09. This is the S&P 500’s first weekly drop since the last week of 2022.
The decline comes as the Q4 earnings season is starting off with less-than-stellar results as companies grapple with the effects of both inflation and the Federal Reserve’s rate increases. Adding to investors’ concerns, executives at banks including JPMorgan Chase (JPM) have said they are adding to reserves to prepare for a recession.
All but three of the S&P 500’s sectors fell last week. Industrials had the largest percentage drop, falling 3.4%, followed by drops of 2.9% each in utilities and consumer staples while financials slipped 2.1%. The three gainers were communication services, which rose 3%; and energy and technology, up 0.7% each.
The industrial sector’s largest percentage decliner was Emerson Electric (EMR) as the technology and engineering company went public with a hostile takeover attempt for National Instruments (NATI) in a potential $7.6 billion deal. This follows several months of rejection by the maker of scientific measuring equipment and software. While shares of National Instruments rose nearly 16%, shares of Emerson Electric fell 11% on the week.
In the utilities sector, decliners included shares of American Water Works (AWK), which fell 4.6%. The company’s Virginia American Water subsidiary said it has agreed to buy the water and wastewater assets of the town of Cape Charles, Virginia, for up to $15 million.
In consumer staples, shares of Procter & Gamble (PG) shed 5.2% as the consumer products company reported lower fiscal Q2 results amid a challenging cost and operating environment. While the company raised its outlook for fiscal 2023 all-in sales, the P&G also said it sees fiscal 2023 earnings toward the low end of its original outlook range due to significant commodity and materials cost headwinds and foreign exchange impacts.
In the financial sector, shares of Allstate (ALL) tumbled 9.6% as the insurer said it expects to report it swung to a Q4 adjusted net loss of $335 million to $385 million from an adjusted profit of $796 million a year earlier.
Also among the financial sector’s decliners, shares of PNC Financial Services Group (PNC) fell 5.6% as the bank reported a weaker-than-expected Q4 adjusted profit per share.
On the upside, the gainers in communication services included shares of Alphabet (GOOGL), which rose 6.4% as the Google parent said it will slash 12,000 jobs as the macro backdrop had evolved over the past two years.
Also in communication services, shares of Netflix (NFLX) climbed 2.9%. The content streaming company reported stronger-than-expected Q4 subscriber growth although its per-share earnings and revenue missed Wall Street’s mean estimates.
Next week’s earnings calendar features a number of heavyweight companies including Microsoft (MSFT), Johnson & Johnson (JNJ), Tesla (TSLA), Boeing (BA), Visa (V), Mastercard (MA), Intel (INTC) and Chevron (CVX).
Key economic reports due next week include the first estimate of Q4 gross domestic product on Thursday and the personal consumption expenditures price index, a closely followed inflation measure, on Friday.
Provided by MT Newswires
Where will our markets end this week?
DJIA – Bullish
COMP – Bullish
Where Will the SPX end January 2023?
Tues: MMM, DHI, GE, HAL, JNJ, UNP, COF, FFIV, ISRG, MSFT, TXN, LMT, VZ
Wed: ABT, T, FCX, CSX, IBM, LVS, TSLA, BA, USB
Thur: ALK, MO, AAL, JBLU, MA, MUR, NUE, LUV, VLO, WDC, INTC, X, V,
Fri: AXP, CVX, CL, VFC
Mon: Case-Shiller, Leading Indicators
Thur: Initial Claims, Continuing Claims, GDP, GDP Deflator, Durable Goods, Durable ex-trans, New Home Sales,
How am I looking to trade?
Currently running mostly stocks with protection getting ready for earning by protective puts and full collar trades
We are starting to add leaps = BA, BIDU, JPM,
Next week Jan 31 we can add back in tax selling shares =m META, DIS, BAC
FOMC rate decision on Feb 1st Wednesday of next week
www.myhurleyinvestment.com = Blogsite
email@example.com = Email
I need a trade? JBLU you could do a 3, 6, Leap bull Call – 8.50 (long call) – 10/11 strike (short calls)
Here is Why China Won’t Attack Taiwan
First of all, every geopolitical issue is defined by three things — geographics, demographics, and economics. Secondly, we have to understand nothing about China is ever as it appears. We can start with the myth of Communist Hegemony in China. As Daniel Greenfield notes:
The scenes from China show that there is a spectrum of opposition, from anger over financial fraud and Zero COVID to traditional calls for democracy and an end to Communist rule. I don’t believe that they will succeed, but the regime has been rattled badly. Zero COVID was to show that people would jump through any hoop, and instead, it showed that there is a sizable undercurrent of public anger, and despite a generation of indoctrination and total media and social media censorship, outrage lurks below the surface.
China is a huge country, but the vast majority of its population, of almost two billion people, live in an area no larger than the land mass East of the Mississippi River in America and are primarily ethnic Han. The rest of China is either very mountainous or very arid. It is sparsely populated, and not that productive agriculturally or industrially. These other ethnic groups hate the Han, and view the central government as illegitimate, and that’s particularly true of Tibet, which is an unending source of resistance to the Chinese Communist Party, which is stunningly corrupt.
Interestingly many of the Han also consider the Chinese government to be illegitimate, and the communist’s handling of the economy and the covid tyranny has enhanced that view. China’s economy is a myth, and finally, many geopolitical analysts are finally acknowledging that. Xii is a true believer in Maoist economics and is driving their economy down the drain.
They’re now provoking India in the Himalayas, for reasons I fail to understand other than they think they will intimate them into believing China will invade India from the North if they interfere with their activity in the South China Sea and Taiwan. They’re unendingly interfering in governments all over the world, which includes their Belt and Road Initiatives, and picking fights with Japan along with the Philippine Islands, Vietnam, and other South East Asian countries involving the Spratly Islands, Paracel Islands, Scarborough Shoal, and what’s being called the nine-dash line area claimed by China and rejected by the rest of the world, which China is attempting to enforce with military intimidation.
India, Japan, and the Philippines are reacting to that with military initiatives of their own, especially Japan, and Taiwan is working an international lifeline via what they’re calling a Parliamentary Outreach. This is not going well for China, and it appears they’re shocked. Imagine that.
India gave the Dalai Lama asylum after Tibet’s 1959 uprising. China decided to launch what was, in reality, an “object lesson war” against India in 1962. That’s an important event in understanding China’s military policies. They love playing the biggest, baddest bully boy on the block with their “object lesson military actions.” They really don’t like full-scale wars, and for good reason, the last one was the Korean War with America, and they took a massive beating throwing away untold thousands of young men’s lives with their tactics.
China really doesn’t have the capability to extend its power much beyond its borders, which they’re working to fix that by building aircraft carriers, with 25-year-old Russian technology, the technology they’ve stolen from others, and a failed economy.
For some time, we’ve been hearing reports the Chinese Communists are going to invade Taiwan and are practicing amphibious invasions, test-launching missiles, and they provocatively keep invading Taiwan’s air space playing intimidation games. Well, there are some things, no matter the rhetoric or provocations by Xi and his government, that represent substance over illusion.
The Chinese know a few things:
> First, this landing they’re practicing is just a big show. The U.S. Marines are the greatest military force in the world for amphibious landings, and it took more than practice to become good at it.
> Secondly, they must know their losses will be massive, in both men and equipment, if they attempt such a landing. Taiwan has a substantial military that would devastate such a landing force; even if they’ve never fought a real war, they’ll be fighting for their homes.
> Third, they have to know even the Biden administration, as stupid as they are, will have to jump in to save Taiwan, even if it’s just involving U.S. air power, and that alone will devastate the Chinese Air Force, their Marine landing force, and any ships they may employ. U.S. Naval aviators are the finest in the world. That’s why they’re called Top Gun! And currently, there are three carrier task forces in South East Asia, two East of the Philippine Islands and one East of Borneo.
> Fourth, they know if they launch a landing and are repelled, their military credibility throughout all of S. E. Asia will tumble like a house of cards. They can’t afford that since they’re attempting to impose an economic hegemony throughout all of Asia via military intimidation.
> Fifth, such an action will trigger economic retaliation the CCP can ill afford. China is actually broke, and I wish more people read the book Khrushchev’s Cold War: The Inside Story of an American Adversary. as it outlines just how devastating all that military buildup was to their economy, and that was from the early 1950s, hence the need for maskirovka to make them bigger than they were. China has the exact same problem, and they’re now having a demographic pyramid problem.
Will they attack Taiwan? No! There are too many negatives and few positives for such an action; even if they were to win, there would have to be long-term political and economic consequences they can’t afford.
What this will do is bring more American, Japanese, Indian, and Australian, forces into the area, just as Soviet outrageous claims triggered an arms race that broke the Soviets back economically; this will trigger responses they won’t like and can’t handle.
If Xi really had the intention of invading Taiwan, the disaster Putin created in his attack on Ukraine is a wake-up call for Xi. China has far more troubles than Taiwan. Xi is now facing a massive outbreak of covid in his population, and the reason for that was the massive lockdowns.
Since their society was, in effect, quarantined, they never were able to develop herd immunity to this virus, and I think combining that with these false vaccines, that are demonstrating they seem to make those vaccinated more susceptible to the virus, Xi has a lot of internal issues. The only resistance these lockdowns created was resistance and demonstrations against Xi in at least 17 cities around the country. They were clearly spontaneous, which many believe was the real reason for more and tighter lockdowns ⏤ because that spontaneity has to be frightening to the CCP. More lockdowns weren’t to stop this virus, but an effort to stop demonstrations against Xi and the Chinese Communist Party.
Invading Taiwan may be great rhetoric for the population in order to divert attention from Xi’s failures, but it’s not a reality.
Ex-Genesis execs claimed they raised millions for crypto hedge fund just as former company neared bankruptcy
PUBLISHED SAT, JAN 21 20231:57 PM ESTUPDATED MON, JAN 23 202311:57 AM EST
- A former Genesis employee sent a message to a prospective investor in December, regarding a fund he was starting called Hunting Hill Digital.
- The fund would be run by three ex-Genesis employees, the message said.
- Genesis, which is owned by Barry Silbert’s Digital Currency Group, filed for bankruptcy protection on Thursday.
Just weeks before crypto lender Genesis filed for bankruptcy, three former employees of the company claimed they had secured millions of dollars for a new crypto hedge fund, according to correspondence viewed by CNBC.
Matt Ballensweig, who left Genesis in September after more than five years at the firm, sent a message to a prospective investor in mid-December, regarding a fund he was starting called Hunting Hill Digital. Ballensweig said he had already secured $2.5 million from Bessemer Venture Partners at a $30 million post-money valuation, and wrote in the message that he and his partners were in the process of raising another $5 million.
Bessemer told CNBC in an email that they are not an investor in Hunting Hill Digital.
The fund’s “flagship product” would go live in the first quarter of 2023, the message said.
Other partners in the fund would include Martin Garcia, who spent more than six years at Genesis, and Reed Werbitt, Genesis’ former head of trading, the message said. Werbitt left Genesis in 2022. and Garcia departed the prior year.
Genesis, which is owned by Barry Silbert’s Digital Currency Group, filed for bankruptcy protection on Thursday, the latest casualty in the industry contagion caused by the collapse of crypto exchange FTX in November. In its bankruptcy filing, Genesis listed over 100,000 creditors, with aggregate liabilities ranging from $1.2 billion to $11 billion dollars.
Ballensweig was named in legal filings surrounding the implosion of Genesis’ lending book. Gemini, a crypto exchange and major Genesis client, accused Ballensweig of falsely reassuring Gemini in July that Genesis was financially stable. Gemini claimed that Ballensweig told its representatives that Genesis had “capital to operate… for the long term,” according to court filings.
Ballensweig did not respond to a request for comment on the allegations made against him by Gemini or on his recent capital raise.
Ballensweig spent his final nine months at Genesis as managing director and co-head of trading and lending.
The ex-Genesis employees teamed up with Adam Guren from hedge fund Hunting Hill, Ballensweig said. Hunting Hill is a $718 million hedge fund, which launched in 2010 and moved into digital asset investing in 2020 with a crypto opportunities fund.
Hunting Hill did not immediately respond to a request for comment.
Ballensweig pitched the flagship product as an “alpha multistrat (delta neutral),” or a fund specializing in multi-strategy, low-risk, high-return investments. He added that the trio would also launch two other beta products including a “Top 25 Index” and a “DeFi beta.”
“Think you’d be a valuable early partner,” Ballensweig said in his pitch.
Ballensweig isn’t the only Genesis alum seeking to launch a fund. Roshun Patel, a former vice president at Genesis who left the company in March after almost four years, was raising cash for a new fund in mid-2022. CNBC reached out to Garcia, Werbitt and Patel for comment on their raises but did not immediately hear back.
Correction: A prior version of this story had the incorrect year for Garcia’s departure from Genesis.
UPDATED THU, JAN 19 20235:11 PM EST
Stocks close lower on Thursday, Dow and S&P 500 notch third day of losses
Stocks fell Thursday as investors grew increasingly concerned the Federal Reserve will keep raising rates despite signs of slowing inflation.
The Dow Jones Industrial Average lost 252.40 points, or 0.76%, to 33,044.56, posting its third down day in a row and giving up its gains from the new year’s rally. The 30-stock index is now down 0.31% in 2023.
Meanwhile, the S&P 500 fell 0.76% to 3,898.85, and the Nasdaq Composite shed 0.96% to end the session at 10,852.27. Both indexes are still positive for the year.
All of the major averages are on pace for their first negative week in three. The Dow is down 3.67% and on pace for its worst weekly performance since September. The S&P and Nasdaq have each lost more than 2% on a weekly basis.
“After the market practically grazed our near-term SPX fair value estimate intraday [4,014 both Tuesday and Wednesday] stocks slid and acted like they needed a breather,” said Christopher Harvey, Wells Fargo Securities head of equity strategy. “The factors driving the sharp YTD rally (short covering, risk bid and lower yields) appear to be hitting their near-term bounds. This will likely will cause the market to trade sideways-to-down over the short term.”
Stocks extended their slide on Thursday after initial filings for unemployment insurance fell to their lowest level since September, the Labor Department reported, signaling to investors that the labor market is resilient amid a slowing economy.
“Despite all the big-tech post-pandemic layoffs, the jobs market remains hot,” said Ed Moya, senior market analyst with currency data and trading firm Oanda. “The labor market needs to break to allow the Fed to comfortably keep rates on hold.”
Claims totaled a seasonally adjusted 190,000 for the week ending Jan. 14, a decline of 15,000 from the previous period. Economists surveyed by Dow Jones had been looking for 215,000.
Investors have been parsing other recent economic data and Fed remarks for clues on how high rates will go. But, while recent numbers point to easing inflation, JPMorgan Chase CEO Jamie Dimon thinks rates will top 5%.
“I think there’s a lot of underlying inflation, which won’t go away so quick,” Dimon told CNBC’s “Squawk Box” from the World Economic Forum in Davos, Switzerland.
Elsewhere, investors are watching key quarterly reports to see if there is an earnings recession brewing. Netflix will report earnings after the bell.
Correction: Initial filings for unemployment insurance fell to their lowest level since September. An earlier version of this story misstated the month.
Something big is happening in the U.S. housing market—here’s where 27 leading research firms think it’ll take home prices in 2023
January 5, 2023 at 9:02 AM MST
For the first time in over a decade, residential real estate across the world has entered into a period of falling home prices.
FROM BAIN & COMPANY
The U.S. housing market is no exception. The streak of 124 consecutive months of positive home price growth, a period spanning from the bottom of the previous bust in February 2012 to the top of the Pandemic Housing Boom in June 2022, has been replaced by a new streak: four consecutive months of U.S. home price declines.
Between June and October 2022, U.S. home prices as measured by the Case-Shiller National Home Price Index fell 2.4%. On the one hand, that’s already big enough to count as the second-biggest home price correction of the post-WWII era. On the other, it’s mild compared to the once-in-a-lifetime 26% correction that occurred between 2007 and 2012.
Back in May 2022, Fortune told readers that “something big” was happening in the U.S. housing market as spiked mortgage rates would soon send housing activity plunging. Once again, we would say something big is happening, to describe a U.S. housing market that has clearly slipped into deflation mode.
The question heading forward is just how much of the Pandemic Housing Boom’s historic 41%-plus jump in U.S. home prices—which has slipped to 38% as of October 2022—will get erased?
To get a better idea of what’s coming for national home prices in 2023, Fortune tracked down the latest housing forecasts from 27 of the nation’s leading housing researchers. Of that group, four expect U.S. home prices to grow in 2023, while the other 23 believe U.S. home prices have further to fall.
Below we present those 27 home price predictions—they’re ordered from most bullish to most bearish.
Realtor.com: The economics team at Realtor.com predicts that the median price of existing homes will rise 5.4% in 2023 while mortgage rates average 7.4%. “The slowdown in home sales transactions that began as mortgage rates surged in 2022 is expected to continue, leading to a moderation in home price growth and tipping housing market balance away from sellers,” write researchers at Realtor.com.
CoreLogic: The real-estate data firm predicts that U.S. home prices will rise 2.8% between November 2022 and November 2023. (Here is CoreLogic’s latest risk assessment for the nation’s 392 largest regional housing markets.)
NAR: The trade group projects that existing home prices are poised to rise 1.2% in 2023 while mortgage rates will average 6.3%.
Freddie Mac: The firm’s forecast model has U.S. home prices falling 0.2% in 2023 while mortgage rates average 6.4%. “We expect house prices to decline modestly, but the downside risks are elevated,” write Freddie Mac economists.
Mortgage Bankers Association: The firm’s latest forecast has U.S. home prices, as measured by the FHFA US House Price Index, falling 0.6% in 2023 and another 1.2% dip in 2024. The group also forecasts average mortgage rates of 5.2% in 2023 and 4.4% in 2024. “Inventories of new homes are increasing at the same time that demand has remained quite weak, and more builders appear to be offering price cuts as well as other concessions to move properties,” write researchers at the Mortgage Bankers Association.
Zillow: Economists at the home listing site forecast that U.S. home values will fall 1.1% from November 2022 to November 2023.
Fannie Mae: Economists at the firm predict that U.S. home prices, as measured by the Fannie Mae HPI, will fall 1.5% in 2023 and another 1.4% dip in 2024. Fannie Mae is currently modeling an average 30-year fixed mortgage rate of 6.3% in 2023 and 5.6% in 2024.
Redfin: The firm’s baseline forecast predicts that the median U.S. home sales price will fall 4% in 2023. “Prices would fall more if not for a lack of homes for sale: We expect new listings to continue declining through most of next year, keeping total inventory near historic lows and preventing prices from plummeting,” writes Redfin.
Amherst: The real estate investment firm, which owns a massive portfolio of single-family homes, tells Fortune that its forecast model has U.S. home prices falling 5% between September 2022 and September 2025. “Incomes are the other side of the seesaw from mortgage rates in setting home prices. We saw no middle-income wage gains for decades. Now it’s happening big-time. Higher rates are a headwind, but rising incomes are a huge support and tailwind,” Sean Dobson, CEO of the Amherst Group, tells Fortune.
Wells Fargo: The bank’s forecast model has U.S. home prices falling 5.5% in 2023. “Markets where home prices shot the highest are now vulnerable to a disproportionate swing to the downside, notably in previously white-hot markets in the Mountain West which saw an influx of remote workers at the onset of the pandemic. Home prices in desirable locations with comparatively tighter supply are likely to hold up much better,” write Wells Fargo researchers.
Capital Economics: Peak to trough, the firm’s forecast model has U.S. home prices falling 8%.
Goldman Sachs: The investment bank expects U.S. home prices to decline between 5% to 10% from top to bottom—with its official forecast model predicting a 7.6% decline. “There are risks that housing markets could decline more than the model suggests,” write researchers at Goldman Sachs.
ING: Peak to trough, the Dutch bank tells Fortune it expects U.S. home prices to fall between 5% to 10%. However, the multinational lender says U.S. home prices could possibly decline by as much as 20%. “The housing market downturn, triggered by rapid increases in mortgage borrowing costs, continues to cause us significant concern. Prices have risen hugely over the past couple of years as demand vastly outstripped limited supply of homes, but this process is going into sharp reverse with mortgage applications for home purchases falling by nearly 50% on the 3Q 2020 peak. At the same time there is more supply appearing on the market and the risk we see a steep correction in prices,” writes James Knightley, chief international economist at ING.
Bill McBride: McBride, a housing analyst and author of the Calculated Risk blog, expects U.S. house prices to fall by around 10% from the 2022 peak. “Since national house prices increased very quickly during the pandemic—up over 40%—it seems likely that some of the usual stickiness will not apply. I think the most likely scenario now is nominal house prices declining 10% or more from the peak, and real [adjusted for inflation] house prices declining 25% or so over the next five to seven years,” writes McBride.
Keller Williams Realty: Ruben Gonzalez, the chief economist at Keller Williams Realty, expects median home prices as tracked by NAR to fall 10% from top to bottom. “I suspect we will see the trough in the first half of . Perhaps March or April but that is dependent on the path of interest rates which have been quite volatile recently,” Gonzalez tells Fortune.
TD Bank: The bank is forecasting that U.S. home prices will fall by around 10% from peak to trough. That includes a 5.7% drop in 2023 and another 2% drip in 2024. “We see home price growth finding firmer footing soon after the start of 2024,” Admir Kolaj, an economist at TD Bank, tells Fortune.
Morgan Stanley: The Wall Street bank expects home prices to fall by around 10% between June 2022 and the bottom in 2024. If mortgage rates fall by more than expected, Morgan Stanley researchers say that the peak-to-trough decline will come in closer to 5%. However, if a “deep” recession manifests, Morgan Stanley predicts U.S. home prices could crash 20% from top to bottom, including up to an 8% home price decline in 2023 alone. “The fact that we expect home prices to start falling on an annual basis in March 2023 despite tight inventory reflects how unprecedented this affordability situation is in the U.S. housing market… However, although supply doesn’t keep home price growth floored at zero, we do believe it prevents home price declines from becoming too large,” writes Morgan Stanley researchers.
Moody’s Analytics: The firm expects a peak-to-trough U.S. home price decline of 10%. If a recession were to manifest, Moody’s would expect a top-to-bottom home-price drop of 15% to 20%. “Affordability has evaporated and with it housing demand… Prices feel a lot less sticky [right now] than they have historically. It goes back to the fact they ran up so quickly [during the pandemic], and sellers are willing to cut their price here rapidly to try to close a deal,” Mark Zandi, chief economist at Moody’s Analytics, tells Fortune. (You can find Moody’s latest forecast for 322 markets here.)
Zelman & Associates: Back in the summer, the boutique housing research firm forecasted that U.S. home prices would fall 4% in 2023 and another 5% in 2024. According to the Wall Street Journal, the firm now expects U.S. home prices to fall 12% between the 2022 top and the 2024 bottom.
Zonda Home: Peak-to-trough, the real estate analytics firm tells Fortune that its forecast model foresees U.S. home prices falling 15%.
AEI: Ed Pinto, director of AEI Housing Center, tells Fortune that he expects U.S. home prices to fall 15% to 20% from peak to trough. Pinto expects prices to bottom out in 2023 or 2024.
CoStar: Peak to trough, CoStar CEO Andy Florance expects U.S. home prices will fall by around 20%. “People who think a 10% drop [in home prices] are dreaming… 20% is more comfortable,” Florance tells Fortune.
KPMG: The Big Four accounting firm expects U.S. home prices, as measured by the Case-Shiller home price index, to fall 20% between the fourth quarter of 2022 and the fourth quarter of 2023. “It was a pandemic-induced [housing] bubble, which was stoked by work-from-home migration trends: high-wage workers going to lower second-tier middle markets for more space… Once you start the process of prices falling nationally, there is a self-fulfilling momentum to it, because no one wants to catch a falling knife,” Diane Swonk, chief economist at KPMG, tells Fortune.
Yieldstreet: By the third quarter of 2023, Yieldstreet expects U.S. home prices to be 20% below its 2022 peak. “Obviously, some markets will be less impacted. Markets that’ll be more impacted are the ones where you have a lot of inventory of new homes, like Phoenix, Las Vegas, Dallas, and Boise. These are markets with a lot of construction, with a lot of new homes… Those are the markets that’ll be the leaders in terms of how much home prices decline. There will be some markets in the Northeast, which haven’t had a lot of new construction, where home prices are expected to fare better in terms of declines,” Tejas Joshi, director of single-family residential at Yieldstreet, tells Fortune.
Pantheon Macroeconomics: The firm expects U.S. existing home prices to fall by around 20%.
John Burns Real Estate Consulting: Peak to trough, the real estate research firm’s revised forecast has U.S. home prices falling 20% to 22%. That forecast is based on the assumption that mortgage rates stay relatively close to 6% through 2023. “Investors accounted for the highest percentage of buyers ever this cycle in many markets. Lion’s share of those [investor] buyers are now on the sidelines, with some needing to sell given overleveraged and really were just taking a flyer on home price appreciation continuing to rip higher. Those days are now over, and these sellers don’t exhibit the same emotional and behavioral qualities associated with traditional owner-occupiers, which historically keeps home prices somewhat sticky on the downside,” Rick Palacios Jr, the firm’s director of research, tells Fortune.
Billionaire Howard Marks says investors have ‘gone from the low-return world of 2009-21 to a full-return world,’ and it’s a ‘sea change’ from the last 40 years
December 14, 2022 at 12:31 PM MST
In his 53 years in the investment world, Howard Marks—the billionaire and co-founder of Oaktree Capital Management—said he’s only seen two real transformations in investing, until now.
“I’ve seen a number of economic cycles, pendulum swings, manias and panics, bubbles and crashes, but I remember only two real sea changes,” Marks wrote in a memo published Tuesday. “I think we may be in the midst of a third one today.”
The first shift, in the 1970s, was the “adoption of a new investor mentality,” as he put it, to embrace risk. Marks said the shift led to new kinds of investments like distressed debt, mortgage backed securities, structured credit, and private lending.
Marks recognized that sea change as it was happening, and he chose to invest in bonds of “America’s riskiest companies,” and made money “steadily and safely.”
“It’s no exaggeration to say today’s investment world bears almost no resemblance to that of 50 years ago,” Marks wrote. “Young people joining the industry today would likely be shocked to learn that, back then, investors didn’t think in risk/return terms. Now that’s all we do. Ergo, a sea change.”
The second transformation came in the 1980s. The Federal Reserve, led by Paul Volcker, raised the federal funds lending rate to 20% to lower inflation that had soared to 13.5% because of a spike in oil prices that pushed the cost of goods up and “ignited rapid inflation,” he said. Three years later inflation had dropped to 3.2%. With that success, the Fed gradually reduced the federal funds rate—prompting a “declining-interest-rate environment that prevailed for four decades.”
Investor success over the last 40 years is largely due to those low interest rates, Marks said, because they fueled an era of cheap and easy money. Bank of America described that environment as an “aberration,” rather than labeling it a new normal.
“The past two decades of ‘2%’ inflation, growth, and wages have ended with a reversion to the long-term historical mean,” BofA’s analysts previously wrote in a research note.
Interest rates hit an all-time low in 2008 after the Fed cut the federal funds rate to zero in an attempt to rescue the economy from the Great Financial Crisis. From 2009 to 2020, when the pandemic began, the “U.S. enjoyed its longest economic recovery in history,” Marks said.
During the Great Financial Crisis, Oaktree raised billions of dollars in debt to purchase distressed assets—and his investors benefited from the firm’s recognizing the opportunity as debt boomed.
But that era ended this year, with high inflation and higher interest rates. Year-over-year U.S. inflation reached a four-decade high at 9.1% in June before slowing to 7.1% in November. It drove the Fed to hike interest rates seven times this year, pushing the federal funds rate to a range of 4.25% to 4.5%.
Pessimism took over optimism, Marks said, and inflation and interest rates are “highly likely to remain the dominant considerations influencing the investment environment for the next several years.”
“We’ve gone from the low-return world of 2009-21 to a full-return world, and it may become more so in the near term,” Marks wrote.
And that means investors can get “solid returns” without having to rely so heavily on riskier investments, which in turn could mean better opportunities for lenders and bargain hunters. But investment strategies that worked best over the last 40 years might not perform well in the years to come—“that’s the sea change I’m talking about,” Marks wrote.
JPMorgan’s Kolanovic gets even more underweight stocks as overtightening risk rises
PUBLISHED WED, JAN 18 20236:48 AM EST
JPMorgan’s top market strategist Marko Kolanovic trimmed his allocation to equities further on concern the stock market is getting too optimistic about a economic soft landing by the Federal Reserve.
Kolanovic, who gained a following for calling the stock market rebound during the pandemic in 2020, remains bullish on commodities. Within global equities, he is overweight China/emerging markets stocks on the reduction of Covid restrictions.
But, he’s overall negative on global stocks, especially those in the United States.
“We remain cautious on risk assets and are reluctant to chase the past weeks’ rally as recession and overtightening risks remain high, and we believe that a lot of good news is already in the price in terms of inflation moderation or the potential for a soft landing,” Kolanovic and his team in a note Tuesday. “While signs of declining inflation pressures are in principle positive, ongoing tightness in labor markets is likely to put pressure on margins, and may cause central banks to tighten further than markets expect.”
Here’s the asset allocation model from the bank now:
- Equities: Underweight by 3% (from 2% underweight)
- Govt. Bonds: Underweight by 5% (from 8% underweight)
- Corp. Bonds: Overweight by 2% (from 4% overweight)
- Commodities: Overweight by 6% (Unchanged from prior)
- Cash: 0% or equal benchmark weighting (from 0%)
Within equities, JPMorgan has a 5% overweighting to emerging markets.
Kolanovic was too bullish heading into 2022 but got cautious during last year on concern inflation would force the Fed to tighten further then investors expect. Despite being too optimistic during most of last year, the strategist said this asset allocation model still beat its benchmark.
“Strong gains over the past year on our government bond UW, our commodity OW, our long dollar bias and our UW in credit as a hedge to our equity OW, more than offset the drag from our equity OW in the first nine months of 2022,” stated the note.
— CNBC’s Michael Bloom contributed reporting.
Investors are holding near-record levels of cash and may be poised to snap up stocks
PUBLISHED WED, JAN 18 20237:52 PM EST
- A record amount of funds flowed into money market accounts as the year ended. Those funds could be the fuel for a major stock rally.
- The Investment Company Institute said money market accounts held a record $4.814 trillion in the week ended Jan. 4.
- But strategists say investors may hold back from putting more money into stocks, since sentiment is sour and money markets are now generating more return than they have been in years.
Simpleimages | Moment | Getty Images
Investor cash holdings are near record highs, and that could be good news for stocks since there is a wall of money ready to come right back into the market.
But the question is this: Will those investors return any time soon, especially with sentiment still so sour and stocks at risk of a major selloff?
Total net assets in money market funds rose to $4.814 trillion in the week ended Jan. 4, according to the Investment Company Institute. That eclipses the prior peak of $4.79 trillion during May 2020, back in the earlier months of Covid-19.
These sums include money market fund assets held by retail and institutional investors.
The level of assets in these money market funds has come off the highs since the start of the year, but Wall Street has already noticed the cash pile.
“It’s a mountain of money!” wrote Bank of America technical research strategist Stephen Suttmeier. “While this seems contrarian bullish, higher interest rates have made holding cash more attractive.”
Staying in a holding pattern while earning income
Investors, worried about earnings and interest rates, may be willing to wait before they put more money into stocks. At the same time, money market funds are actually generating a few percentage points of income for the first time in years.
That means investors may be finding a safer way to generate some return while they wait for the right moment to invest. Consider that sweep accounts, where investors hold unused cash balances in their brokerage accounts, can park those amounts in money market mutual funds or money market deposit accounts.
Cresset Capital’s Jack Ablin said the change in behavior toward money markets reflects a bigger shift in the investing environment.
“Cash is no longer trash. It’s paying a reasonable interest and so it makes the hurdle higher over which the risky assets have to jump to generate an additional return,” Ablin said.
Julian Emanuel, senior managing director at Evercore ISI, said the surge into money markets was a direct result of selling stocks at year end.
“If you look at the flow data for the middle of December, liquidations were on the order of March 2020,” he said. “In the short-term, it was a very contrarian buy signal. To me this was people basically selling the market at the end of the year, and they just parked it in the money market funds. If the selling continues, they’ll park more.”
In search of relatively safe yield
Emanuel said anecdotally, he is seeing signs of investors moving funds from their lower paying savings accounts to their brokerage accounts, where the yields can be close to 4%.
Be aware that money market accounts issued by banks are insured by the Federal Deposit Insurance Corporation, while money market mutual funds are not.
Still, with December’s inflation rising at a 6.5% annual rate, higher prices for consumers are chiseling away at any gains.
Ablin said the change in investor attitudes about money market funds and also fixed income came with Federal Reserve interest rate hikes. Since last March, the Fed has raised its fed funds target rate range from zero to 0.25% to 4.25% to 4.50%. Those money market funds barely generated interest prior to those rate hikes.
For instance, Fidelity Government Money Market Fund has a compounded effective yield of 3.99%. The fund generated a 1.31% return in 2022.
Ablin said bonds have become attractive again for investors seeking yield.
“We like the fact that the bond market is finally carrying its own weight after years and years,” he said. “From that perspective, you would expect a rebalance away from equities into bonds. They’ve essentially been fighting equities with one hand tied behind their back for 10 years or more.”