1/ Stocks and Interest Rates Flip the Script
2/ Is the Housing Market Really About to Crash?
3/ These Homebuilder Industry Stocks are Bullish
4/ The News the Fed Cares About This Week
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1/ Stocks and Interest Rates Flip the Script
The next meeting of the Federal Open Market Committee (FOMC) is scheduled for September 19th, but the data they will watch most closely gets reported this week. Both the FOMC members and the market in general like to use interest rates to regulate the forces of inflation. As a result, shrewd investors and FOMC members alike keep a close watch on the relationship between interest rates and stock prices.
This relationship is most easily observed by comparing the 10-year Treasury bond yield (TNX) with the benchmark S&P 500 Index (SPX). The chart below shows how this comparison has undergone an important shift over the past couple of months.
The movement of TNX and SPX are often positively correlated during periods of bullish market movement, and negatively correlated during periods of bearish market movement. It wasn’t terribly surprising that during 2022, when the Fed aggressively raised interest rates to combat inflation, that market rates, such as the 10-year note yield, would rise while stocks fell.
What is more surprising is that this dynamic has made a distinct change even though the Fed hasn’t stated that its battle against inflation is officially over. Although they signal as much in the coming weeks, you can see from this chart that the market is anticipating the shift already.
2/ Is the Housing Market Really About to Crash?
If interest rates were to climb higher and remain that way in the coming months ahead, then home buying trends might lose steam. In fact there is no shortage of social media content creators willing to tell you that very thing. But if the FOMC is about to stop raising rates, and if this will translate into lower market rates for borrowing, then perhaps fears of a housing market crash are overblown.
At least that’s what the next chart seems to be telling us. This chart compares State Street’s Homebuilder Industry ETF (XHB) with its S&P 500 Index ETF (SPY).
When XHB outperforms SPY, it typically signals that the real estate market has more demand than supply, that profits will rise for homebuilding companies, and that home prices are likely to continue going up. That’s the opposite of a market crash.
During 2022 this chart looked very different. So far this year stocks have managed a healthy return of greater than 15%, but stocks in this group, on average, have managed more than double that rise.
3/ These Homebuilder Industry Stocks are Bullish
Within the homebuilder industry group certain stocks have surged ahead of the rest. The chart below compares XHB with several of the fund’s largest holdings including: Carrier Global (CARR), Owens Corning (OC), PulteGroup Inc (PHM), Home Depot (HD) and Whirlpool (WHR).
All of these stocks have had a favorable run so far, but the first three have led the way. CARR and OC may be experiencing a seasonal rise resulting from the hot summer months, but even if they slow with cooler temperatures, there is reason to believe they may not have reached a top yet. If the FOMC decides not to continue hiking rates in the near future, these stocks are likely to continue their upward trend.
4/ The News the Fed Cares About This Week
Two reports worth watching for will come out later this week. On Wednesday the Consumer Price Index (CPI) and Core CPI numbers will be released. Thursday the Producer Price Index (PPI) and Core PPI numbers follow. These two data points taken together are key inputs to the Fed’s picture of inflation and its impact on the economy.
Last month’s CPI report showed that the trailing annual rate of inflation had continued to show a trend of steady decline from recent highs.
However, the month-to-month increase from July to August marked the first time this rate had shown any increase since the high-water mark was reached last year. This creates a bit of uncertainty about the Fed’s direction going forward from here and may be one of the primary reasons markets have shown a bit of pullback in recent weeks. The Chart Advisor will give you a front row seat for the impact of the breaking news this week, so stay tuned for upcoming editions.
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Originally posted 11th September 2023
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