Market Commentary 07/01/2022, Market Commentary 07/01/2022

Market Commentary 07/01/2022

Mortgage Rates Fall As Recession Fears Intensify

Treasury yields quickly raced to well under 3.00% this week. In my opinion, this is not a good sign of things to come. Recession fears have escalated. The long bond acts like this when recession fears rise.  GDP now has economic growth at -2.1%. Micron, a major chip supplier, guided down and reaffirmed what many of us already know. The economy is slowing. The combination of Fed rate hikes and quantitative tightening is a dangerous cocktail for the equity, real estate, and debt markets. I am hearing from several banks that liquidity is quickly drying up. They are weary to lend, and risk spreads have increased. As expected, housing supply has jumped as homeowners look to sell before things get worse, or in some cases unload their second or third home. A violent stock market and bitcoin correction have consumer confidence at a many years low, with liquid savings and retirement accounts down a great deal.  With margins being squeezed and earnings estimates falling, S&P year-end estimates have come down with year-end S&P to be somewhere in the range of 3,200 and 4,100.   

Where Do We Go From Here? Equity, Real Estate, Inflation. 

First, let us start with the equity market. Equities rise and fall and are prone to large drawdowns and rebounds. Many of us got into trouble chasing momentum stocks and high beta tech stocks, which have no earnings power.  Stocks represent ownership in a business, but zero rates and money spraying had fooled many professionals into believing that stocks only go up. The same applies to crypto. 

Two, regarding real estate, price is what you pay, and value is what you get.  Homes are a bit different asset class than other real estate as many homeowners were able to lock in exceptionally low-interest rates. Even if the housing market declines, homeowners will be able to service their debts. Home appreciation over the last few years has been unsustainable. The new listings appearing amidst the dwindling economy warrant the need for a correction. People are becoming increasingly cautious. As interest rates return to the historical mean, speculation will lighten, and buyers and sellers can enter a more even playing field.   

Three, the Fed will beat inflation. It is already happening. It will occur at a significant cost and over time, but inflation will come down. The Fed’s tools are very good at breaking inflation (higher rates and quantitative tightening). The collective negative sentiment compounded with quickly deteriorating financial conditions indicates the need for the Fed to halt its rate-hiking cycle expeditiously. The 2-year Treasury has fallen mightily the last few days which supports the notion of fewer rate hikes ahead.

Finally, it is important to remember that this is a long game. Absent the last 20 years or so, recessions and rebounds were much more common.  Recessions clean out the financial system and are healthy.  Speculators are taught about assessing risk, bad companies die off – clearing the way for new more innovative businesses, and prices reset allowing investors to buy assets for cheaper.  While I may be negative on the markets currently, I am always bullish on America. We have so much to be grateful for, even in tough times.

Have a great 4th of July.

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These are the opinions of the author. For financial advice, please talk to your CPA or financial professional.