Equity Market Volatility Pushes Bond Yields Lower
It was another week of agonizing volatility in both the bond and equity markets. Big box retailers reported tighter margins due to high inflation. Economists continue to move year-end targets down. One wonders if all of this negativity signifies an end to selling. S&P touched correction territory before trading higher into the close on Friday. Long-dated bond yields fell below 2.800%. Trading remains volatile but orderly. As we have mentioned previously, don’t expect the Fed to step in and backstop the equity or housing market anytime soon. Inflation is the Fed’s primary concern and they will tolerate a falling equity market and a higher unemployment rate to subdue inflation. Case in point, the WSJ reported that subprime credit delinquencies are rising from historically low levels as the increased cost of food and energy preys on consumers. Even the wealthy appear to be cutting back on spending. The soaring costs across all corners of the economy are weighing on people’s confidence and willingness to spend.
Impact On Real Estate & The Global Economy
Limited housing inventory will keep home prices from falling too dramatically. However, given the wealth destruction incurred in both the bond and equity market, it is difficult to see real estate being impervious to recent events. The dramatic rise in mortgage rates over the last 60 days will push some buyers to the sidelines.
With China shut down, and the world economy slowing, perhaps long-term interest rates will continue their recent descent. This would be helpful to growth stocks in addition to homebuyers, consumers, and businesses. We hope that long rates don’t move too low, as an inverted yield curve would be worrisome. Housing demand remains healthy, which bodes well overall for the economy. Should this change, we would become very nervous over a deep recession.
Next week is important for the markets as the Fed’s favorite inflation gauge, the PCE, is released. The markets will respond favorably should inflation appear to be topping out. However, should the reading come in hotter than expected, be prepared for a sobering market reaction.