This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
The Poor(er) U.S. Consumers
The Week in 60 Seconds
Sept. 16: The Fed released U.S. household balance-sheet statistics for the June quarter, and as we forecasted three months ago, a drop in equity values drove a $6 trillion (4.1%) decline in aggregate net worth, to $144 trillion. This was the largest quarterly decline in net worth since the onset of Covid (1Q20: -5.1%), and before that, the financial crisis (4Q08: -5.0%).
Equities fell 17%, from $38.4 trillion, and to only 19.7% of total assets (Q1-end: 22.8%). The 19.7% is the lowest since 2Q20. The decline in equities was only slightly offset by rising real estate values. Cash ticked slightly lower ($18.52 trillion vs. $18.65 trillion), the first decline since 2Q19.
Shrinking household balance sheets, the draw-down of excess savings, and the reliance on revolving credit suggest that the American consumer is running on fumes. A recession by the first half of 2023 may be inevitable.
Christopher P. Harvey, Gary S. Liebowitz, Anna Han
Big Chill in Housing
Commentary & Analysis
Sept. 14: For the week ended on Sept. 9, overall mortgage applications fell by a week-to-week 1.2% after easing by 0.8% in the preceding span. Applications for home purchase inched up by 0.2% after ebbing by 0.7% in the prior week. Applications for refinancing purposes dropped by 4.2% after declining by 1.1% in the previous week.
While week-to-week movements in these data can be affected by seasonal-adjustment difficulties, it is nonetheless clear that the downward trend continues for home-purchase applications. Refi applications, meanwhile, continue to decline, while mortgage rates have resumed rising.
The purchase index, after having rebounded for some time, dropped sharply in February and briefly stabilized in March; since then, it has been sinking further. A combination of substantially higher mortgage rates and a steep run-up in house prices is having a significant negative effect on demand. The refi index shows an even starker picture, with soaring mortgage rates having a chilling effect on demand for mortgage refinancing.
Please Listen to the Fed!
Weekly Technical Review
Sept. 13: Wall Street has been consistently wrong about what the FOMC [Federal Open Market Committee] would do, despite being told repeatedly by FOMC members what they planned. In March, the FOMC said it would increase the funds rate expeditiously to neutral last spring and, in recent weeks, that an increase to 3.75% to 4.25% was likely. Fed Chairman Jerome Powell’s Jackson Hole speech was a wake-up call, but Wall Street has continued to harbor the bullish illusion that the FOMC will be cutting rates next year. The latest consumer-price-index miss relative to CPI forecasts was a jolt, since the Street has been overfocused on inflation easing as the basis for its dovish posture. The FOMC is now far more likely to increase the funds rate by 0.75 [percentage point] at the Sept. 21 meeting than the 0.50 that I thought was possible…
The FOMC members have referenced the “extreme” tightness in the labor market for months, but investors have not been listening. Sooner or later, Wall Street will experience another narrative adjustment when the FOMC’s messaging about the need to create more slack in the labor market, and an attendant increase in the unemployment rate to 5% or higher, sink in.
Don’t Buy the Plunge
The Lancz Letter
Sept. 13: Why are [we] not more positive on the stock and bond markets, especially after prices plunged through most of 2022? Typically, we would be buyers into weakness, but one year ago, our research saw the highest level of risk being taken by investors since the late 1990s. [It] was a pivotal time when investors didn’t understand the amount of risk they were taking, nor the degree of risk in bonds or those 60/40 stock/bond allocated portfolios. The Russia/Ukraine conflict made our energy overweight pay off even more quickly than we expected, but other sectors will struggle from this rising interest rate and high inflationary environment. Earnings will struggle in most other sectors, so the latest plunge in valuations is not yet as appealing in the current scenario as it would have been typically. In other words, if earnings decline while many balance sheets have deteriorated, then current price/earnings ratios will need to be adjusted. It is more critical than ever to be selective, as there will be more losers than winners.
Alan B. Lancz
The Case for Europe
Advisors Capital Management
Sept. 12: Europe’s short-term challenges don’t change the long-term fundamentals for most of Europe’s companies, and even the short-term impact will be muted for many. Many larger companies, especially, don’t depend solely on Europe’s near-term economic fundamentals. There are several global leaders based in Europe, but with majority exposure to other parts of the world. Our holdings include worldwide industry juggernauts in such areas as food products; luxury consumer goods; semiconductor fabrication equipment; chemicals, food, and fragrance ingredients; industrial automation tools and services; 3-D design software; and biotechnology therapeutic solutions. A few of these lack meaningful competitors from the U.S. or anywhere else in the world. Those that do face competition currently enjoy a competitive edge due to the cheap euro…
European stock valuations are beyond compelling—some would say stupid cheap. The relative price-to-book ratio shows Europe’s valuation at 44% of the U.S. When this ratio moved below 70% in late 2001, considered cheap at the time, European stocks outperformed U.S. stocks by 166% over the next seven years.
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