Climbing Out of a Jackson Hole

Aug 23, 2022

By Ben Norris, CFA, Securities Research Analyst, Associate Vice President

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The major stock averages recorded losses last week, marking the end of a multi-week rally that saw stocks move out of bear-market territory thereafter. The S&P 500 (SPX) lost 1.2% last week and snapped a four-week streak of gains as growth stocks underperformed. The S&P 500 Growth index lost 2% while its Value counterpart lost just 0.5%. Overall, gains were narrow with just 30% of subindustries seeing gains for the week with most coming from the Consumer Staples, Utilities, and Health Care sectors. To emphasize the divergence between style returns last week consider that the Dow Jones Industrial Average (DJIA), which is largely value-style blue chip stocks, lost just 0.2% while the more growth-style Nasdaq Composite (COMP) lost more than 2.6%. The recent rally looks like it ran out of steam just as SPX was approaching its 200-day moving average, which has historically acted as a level of support when the market is falling and a level of resistance when the market is rising. Stocks went from being “oversold” to “overbought” exceptionally quickly over the last month. Overbought in this case means that the average stock trades far above its 50-day moving average while oversold is far below its 50-day.

The extreme shift in positioning on stocks reflects an extreme shift in underlying investor sentiment. First, corporate earnings were better than expected for the second quarter, with full-year growth expectations remaining comfortably positive. Second, earlier this summer investors seemed like they were mentally preparing for a long and relatively deep recession to take hold sooner rather than later. Recent economic data – GDP growth, Inflation, Consumer sentiment, etc. – has convinced investors that if/when we do have a recession, it might not be a particularly bad one and that it may be a bit farther off than most people anticipate. Most economists now forecast a recession coming sometime in 2023 at the earliest, despite the U.S. recording two consecutive quarters of negative GDP growth so far in 2022. A strong labor market and resilient consumer consumption behavior have so far been enough to offset a technical decline in economic activity. Similarly, expectations that economic activity numbers – GDP and other measures – will be revised higher, showing that things have not been as bad for the economy as headlines would suggest.

There is one area that I want to highlight because of new data released last week and for its relevance to the ongoing conversation around the Federal Reserve, inflation, GDP growth, and a potential recession. Housing makes up a significant portion of consumer spending, especially for consumers on the lower end of the income spectrum. Rising interest rates and a lack of supply has created a potentially precarious environment for the U.S. housing market. Last week data showed that housing starts were down more than 8% from the prior year. The headline figure doesn’t tell the entire story, however. Single-family home starts were down 18% while multi-unit (apartments) starts were up 18%. This likely indicates that homebuilders anticipate that most consumers won’t be able to afford a home in the near future and will have to resort to renting until affordability improves. Housing permits, which can be viewed as a representation of homebuilder expectations, are showing the same trends. Similarly, existing home sales are down 20% year-over-year.

The housing situation can be attributed to a combination of higher interest rates as well as labor and supply chain issues. A lack of supply has pushed the median price for an existing home to more than $400K, up nearly 11% versus a year ago. Interest rates are to blame as well, as the typical 30-year mortgage rate is up roughly 2% over the last year. Since December 2021, the effects of higher prices and interest rates have pushed the average 30-year mortgage payment 43% higher, a significant headwind for home ownership and consumer activity. This is a worrisome trend because consumer activity and inflation are both closely tied to how much people pay for where they live regardless of whether they own or rent. Rents will continue to push higher as demand increases and the recent surge in home prices likely means that the U.S. housing market will see stagnant prices for the next few years as it digests the spike. In turn, an argument could be made that housing costs will play a part in stubbornly high inflation over the next several years. The Fed’s job is made even more difficult as they have to maintain or further raise interest rates which continues to make housing more expensive and in turn depresses consumer activity – the primary driver of U.S. economic activity. The Fed has found itself in a hole that could take a while to crawl out.

Not all data was negative last week, Industrial Production and Capacity Utilization data were both solid last week – decent arguments against a near-term recession. Leading Economic Indicators were better than low expectations.  Employment numbers remain strong with unemployment figures hovering near historic lows. The Philadelphia Fed’s manufacturing index was a surprising positive last week as well. Looking ahead to this week, the annual meeting of U.S. Federal Reserve policy makers in Jackson Hole, Wyo., will take place in person for the first time since 2019 and concludes with an address from Fed Chairman Jerome Powell on Friday. Powell’s speech will be closely watched by the market and could be an opportunity for Powell to reset expectations for Fed actions going forward. Fittingly, the Fed’s preferred measure of inflation – Personal Consumption Expenditures (PCE) – will get an update on Friday as well.

Date Report Previous Consensus
Monday 8/22/2022
Tuesday 8/23/2022 U.S. Manufacturing PMI (August) 52.2 51.7
U.S. Services PMI (August) 47.3 50.0
New Home Sales (seasonally adjusted annual rate) 590K 575K
Wednesday 8/24/2022 Durable Goods Orders (July) 2.0% 0.6%
Pending Home Sales Index -8.6% -3.0%
Thursday 8/25/2022 Initial Jobless Claims
Continuing Jobless Claims
Q2 Real GDP Revision -0.9% -0.5%
Friday 8/26/2022 Jerome Powell address at Jackson Hole
PCE Price Index (July, y/y) 6.8%
Core PCE Price Index (July, y/y) 4.8%
U.Michigan Consumer Sentiment Index (August) 55.1 55.3


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