Chart Content: U.S. 30-year average mortgage interest rate since 1998
Chart Significance: The lack of supply in the U.S. housing market continues to be met with historically high demand. The recent path of interest rates has generated a dynamic that has done little to sway homebuyers away from seeking housing units. Although the Federal Reserve’s monetary policy actions remain within the bounds of an appropriate response to the current health of the economy, mortgage interest rates have skyrocketed to multi-year highs. Conventional wisdom may suggest a slow-down in the housing market is right around the corner.
Potential Forward-Looking Implications: The absolute level of current mortgage interest rates remains within an acceptable historical range,
and it is one that will undoubtedly create the environment for a potential subdued housing market in the short-term. The severity of that,
however, in addition to the potential longevity, remains in investors’ favor. Underestimating the current fiscal health of U.S. consumers will lead
to false conclusions on the ability of the economy to weather appropriately higher interest rates.
Chart Content: Technical analysis showcasing the percent of S&P 500 constituents trading above their 200-day moving average price.
Chart Significance: The chart provides a working snapshot of the oversold nature of the S&P 500 relative to previous historical volatility cycles. From a practical and fundamental standpoint, the current reading of 34% remains nearly 30% lower from the historical average and it bares no meaningful basis for sustaining its trend at current levels. This is a function of strong corporate earnings and a consumer demand cycle that has yet to lose steam.
Potential Forward-Looking Implications: Although the possibility for sustained short-term volatility remains possible, investors should use caution in generating assumptions of systemic and prudential risks in the U.S. economy. Much of the current volatility in the S&P 500 remains grounded with individual names that entered 2022 in a notably overvalued state and remained prone to risks amidst rising interest rates. Exuberant gains in such companies, mainly embedded within the technology sector, are now simply experiencing a short-term reversal. We would argue that this is a reversal capable of attracting net new cash from the sidelines, which may build the next wave of secular growth.
Chart Content: Measure of consumer sentiment in the U.S.
Chart Significance: The perceived systemic issues in the U.S. economy appear to be exacerbated by investors, particularly when considering the news of rising inflation. Volatility within capital markets has further added to the uncertainty and has generated appropriate angst, not to mention the added uncertainty from supply chain issues from the war in Ukraine. While those components can certainly have a measurable impact on sentiment, the current data indicates a near disastrous sentiment level the likes of which was last seen during the Global Financial Crisis. Are consumers in such a dire situation where this makes appropriate sense? We would adamantly, and objectively, argue no.
Potential Forward-Looking Implications: We believe the U.S. economy is at, or near, peak inflation, which may provide for notable opportunity in sentiment improvement. The backdrop for this to occur remains in the economy’s favor when considering the strong fiscal health of consumers. In fact, sentiment at current levels would suggest a consumer profile that is unable to pay off debt, unable to access debt, unable to prop-up solid demand for goods and services, and unable to spend on leisurely family expenditures (i.e., vacations). None of that remains true today, which is why we believe current sentiment data remains a strong contrarian indicator.
Edison Byzyka, CFA – Chief Investment Officer – Credent Wealth Management
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
All other data, including returns, sourced from Bloomberg, through the release of monthly figures from the Department of Labor, U.S. Bureau of Labor Statistics, or from the Federal Reserve and any of its affiliated regional locations.