Similar to being glad not to hear about Covid every day, all of us look forward to the day when we no longer hear about inflation! For now, we have no choice but to just deal with it.
This week, we’ll hear September’s Consumer Price Index report. In August, the headline number came in at 8.3%, with the Core registering a 6.3% print.
Housing Market and Inflation
What’s surprising is that the current fall of the housing market is not yet reflected in the CPI data. Earlier this year, housing prices were up approximately 20% year-over-year, which is huge. The Federal Housing Agency last month reported a .6% monthly decline in its home-price gauge in July, bringing the rise from a year earlier down to 13.9%, from its February 20% peak.
Overall shelter costs make up 42% of the CPI, however house prices are only indirectly infused into the CPI by what’s called owners’ equivalent rent or OER. OER is calculated by homeowners guessing what it would cost to rent their homes, which was up 7.8% in August, from a year earlier. This trend has been accelerating!!
Approximately 1 year ago, you could secure a 3% 30-year fixed mortgage rate. For a 500K mortgage, the monthly payment was $2102/month. Today at 6.7%, the same 500K mortgage requires a $3208/month commitment. That’s over a 50% increase in monthly outflow, disqualifying many new home buyers. The numbers are relevant for both smaller and larger home loans.
So far, the Fed’s tightening has hit the bond market, the stock market and the housing market. It’s only a matter of time until the rapid rate increase pace will hit the overall economy. Last Friday, the September jobs report was released, suggesting we created 263,000 jobs (compared to 315,000 in August). The trend certainly appears to be shrinking each month. Job openings even fell 10%.
It’s been a while since I can recall that a solid jobs report was viewed with such extreme negativity.
3rd Quarter Earning to begin!
In addition to inflation data this week, 3rd quarter profit reports and guidance will start to be released, with the likes of PepsiCo, BlackRock, Delta Air, Walgreens and some major banks reporting. This is where the current rubber hits the road.
Have stock prices been lowered enough to reflect the current level of interest rates? The overall PE ratio of the S&P 500 using an “equal” weight approach (meaning all companies count the same), sits at approximately 13.9. Average PE is between 16 and 18. Outside of some larger tech-sector companies, stocks appear to be undervalued, even with the Fed going crazy.
The challenge is – the Fed is refusing to blink! “Pivot” is the term being thrown around today. Chair Powell & company have certainly proven to not have a good read on the economy, evidenced that they were still buying large blocks of bonds in February 2022, even when the inflation genie was already out of the bottle. The Fed risks losing credibility if it pivots too soon, which is why I believe they will either error again, or have no choice. It’s amazing to me the Fed still thinks they actually have credibility in the eyes of the public. As a member of the public, I think not!!
We are now in the 4th quarter of the year. After early October, seasonal trends suggest the market should fair better this quarter than the 3rd. Most of the bad news is very much known and reflected in current stock market pricing. Let’s hope the seasonal trend does play out, and we finish the year higher than current levels.
A silver lining in a down market is you can sell stocks and other securities that have lost value. In a non-retirement portfolio, tax losses can offset stock gains, either this year or going forward, indefinitely. You cannot however purchase the same security within a 30-day period after it’s sold. If you do so, it’s called a wash-sale and you will lose the tax loss. There are a handful of other rules that need to be followed to make sure you harvest losses properly.
To make sure you’re taking advantage of this “silver lining” appropriately, please feel free to reach out to discuss your situation.
For existing clients, we are now beginning to harvest losses for future benefit.