Weekly Stock Market And Economy Recap: Fed Continues To Appease Markets

S&P 500 earnings update

Existing home sales for July came in at 5.99 million, +2% over the prior month and +1.5% over the last 12 months.

“We see inventory beginning to tick up, which will lessen the intensity of multiple offers. Much of the home sales growth is still occurring in the upper-end markets, while the mid- to lower-tier areas aren’t seeing as much growth because there are still too few starter homes available.”

Months of supply in single family homes ticked up from 2.3 to 2.5, but down from 3.6 at this time last year.

“Although we shouldn’t expect to see home prices drop in the coming months, there is a chance that they will level off as inventory continues to gradually improve. In the meantime, some prospective buyers who are priced out are raising the demand for rental homes and thereby pushing up the rental rates.”

The median sales price for new homes increased from $370,200 to $390,500 in July, a gain of 5.5% for the month and prices are up 18.4% over the last 12 months.

Astute readers have asked why I only paying attention to new home sales since its only a small subsection of the housing market. The reason is that new home sales has historically been a better leading indicator for the economy.

My purpose is to take an objective look at the state of the whole economy (along with corporate earnings), as opposed to just the housing market itself. And new home sales has historically been the better of the two in that regard. But I will include existing sales data from now on, so we can all follow along in real time.

Corporate profits soared to a new all time high in Q2, coming in at $2.785 trillion. This represents a growth rate of +9.2% over Q1 and +43.4% over Q1 2020.

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They go on to throw some cold water on this feat by highlighting the market's performance afterwards. The average drawdown was -14% (corrections typically fall in the 5-15% range), the average gain one year later was +7.2%, but this is skewed by the +41.9% gain after the 1996 rally. The median gain 1 year later was only +2.6% and the market was higher 1 year later only 43% of the time.

Check out the full post here if you are interested. They also take note of the deteriorating advance/decline line, which was something I highlighted last week.

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This was a big week for monetary policy. Fed Chair Powell, in his speech on Friday, punted on laying out a time table for “tapering” the bond buying program. And highlighted that even if the committee announces tapering plans, it still remains far from meeting the criteria for raising interest rates.

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The market apparently loved the overall dovish tone of the speech. I still expect tapering to begin by year's end, but this shouldn’t be feared by investors. Financial market liquidity was a problem at the height of the COVID shutdowns, but it's no longer the case. In fact, you can make the argument that there is too much liquidity in the system, and the Fed should begin unwinding sooner rather than later.

The key economic data point making headlines last week was new home sales. Although we saw a monthly uptick for the 1st time since March, the -27% year-over-year decline is something we typically only see during recessions. A result of low supply and high prices.

Inventories are increasing, but currently much of that consists of homes that aren’t yet completed, which won’t help the immediate problem. Expect the COVID restrictions to continue to hinder progress in the near term but this is not a demand problem. Looking ahead, as more supply comes online, new home sales should continue to grow, and price appreciation could moderate. I wouldn’t read too much into this.

It’s a perfect example of why you shouldn’t base an analysis on any one single data point. I use the legal term “preponderance of evidence,” which means the data as a whole, as opposed to “cherry picking” one or two data points that support a particular outlook or prediction. I see investors fall for this all the time. No two situations are ever alike. Basing analysis and investment decisions on one thing, even if it’s had a great track record in the past, is prone to failure.

And results have come in almost 5% above street expectations. Which far surpasses anything we have seen in recent history. This is not a financial engineering story. The earnings yield on the S&P 500 remains almost triple what the 10-year treasury bond rate is, and earnings continue to beat expectations at a level we haven’t seen in a long time.

A market correction could occur at anytime, but its hard to get ultra bearish in this environment. The Fed could be the only thing that messes this up, if they make a policy mistake. But for now, they seem to be doing everything they can to appease markets.

Next week: We have 9 S&P 500 companies reporting earnings. I’ll be paying attention to Zoom Video Communications (NASDAQ:ZM) on Monday, Crowdstrike Holdings (NASDAQ:CRWD) on Tuesday, Veeva Systems (NYSE:VEEV) on Wednesday, and DocuSign (NASDAQ:DOCU) on Thursday.

For economic data, we have consumer confidence on Tuesday, ISM Manufacturing PMI on Wednesday, ISM Services PMI and the BLS employment report on Friday.

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Written By: Michael Gouvalaris