Rumours of U.S. Housing Recovery Overestimated

Weekly Commentary

Market Recap

• Equity markets rebounded this week amid relative calm on the economic data and monetary policy fronts.
• The S&P 500 rose 1.9%, led by a mix of materials, communication services and industrials, while defensive sectors like consumer staples, utilities and health care lagged.
• The data flow was largely a wash this week, with durable goods orders and pending home sales posting solid gains in January, the services ISM holding well in expansion territory, but the manufacturing ISM showing continued weakness and auto sales slipping in February.

U.S. Housing Market

In January, the outlook for the U.S. housing market was starting to look optimistic—the consumer was spending, the onset of a recession looked to have been pushed back, and the U.S. Federal Reserve appeared to be approaching a rate-hiking pause. As a result, mortgage applications started to pick up. But the most recent U.S. inflation numbers, which came in higher than expected, changed everything. That’s caused a reversal of expectations, as investors now see several rate hikes ahead. That downside risk has caused housing prices to come off a bit again. Overall, caution is back in the market—for example, recent earnings reports from major retailers like Macy’s and Best Buy show decent current results but warn of potential trouble ahead. It all ties back to inflation: as long as it remains sticky, the Fed will continue to raise rates, and that will hold back the consumer and in turn the housing market.

Bottom Line: A significant uptick in U.S. housing prices is unlikely until the Fed gets closer to a rate-hiking pause.

Bank Earnings

Recent Canadian bank earnings can be read in several ways. For starters, every firm within the wealth management space is dealing with the aftereffects of last year, when we saw a significant destruction of wealth—in housing, in equity and bond markets, and as a result of higher interest rates. It’s no surprise that those factors have had an impact. But despite those headwinds, some Financials have held up relatively well in February compared to the broader market. In our view, that’s because they’re reasonably priced from a valuation perspective, and they provide a cushion on dividend yields. Returning to the earnings themselves, we think it’s a company-by-company story, with results contingent on how each bank is executing their strategic plans, how their loan loss provisions are working, how much exposure they have to the housing market, and so on. Going forward, we expect results to be more differentiated than what we’ve seen recently. This has been the case in the U.S., where we saw good numbers from JPMorgan but not from Wells Fargo. As JPMorgan CEO Jamie Dimon has noted, consumers are still spending, but they’re making choices with their spending patterns. The assumption is that the consumer will eventually slow down, but we don’t know when, or by how much.

Bottom Line: With the consumer relatively healthy (for now), bank performance can best be forecast on a case-by-case basis.

Tesla

Tesla is an interesting story. In November and December of last year, they experienced a steep decline in their stock price. But this was followed in January by a big resurgence when the market recovered. Tesla now seems determined to move down the price ladder, making their vehicles available for cheaper—they’ve correctly realized that to get the volume they’re looking for, they’ll need a car that works for the broader market. But that could impact their profit margins. The key here is that the electric vehicle (EV) market is becoming very competitive. Tesla had the first mover advantage, but there are now more choices for the consumer. It could be that Tesla’s decision to lower prices is a long-term gamble to make it tougher for the competition—Tesla can withstand lower margins, but less-established companies might not. If so, it’s a smart move. But even if Tesla is playing the long game, it will impact their margins in the short term, and raising prices down the road after consumer expectations have been set lower could prove challenging. Battery charging stations are continuing to open in more locations, and Tesla will seek to capitalize on that momentum. But as other companies start to increase their production, there will be more choices out there, and that competition will only increase as China reopens.

Bottom Line: EV prices are coming down but it’s not because of cost savings, which means that Tesla’s margins are likely to be affected.

Positioning

Our Multi-Asset Solutions Team recently updated the house views based on what we’re seeing in the market. You can access all of our portfolio positioning decisions via the full report: A Winter of Sunny Surprises.

BMO’S “FIVE LENSES” STRATEGY

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Originally Posted March 6, 2023 – Rumours of U.S. Housing Recovery Overestimated

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