Market Musings Blog

Why Did the Market Do That?

The media loves to ascribe a reason for every significant stock market move. Humans feel better if there is an answer to ‘why?’ How many times have you read something like, “Stocks fall on worries over trade”, or “Stocks down on concern about inflation”? The reality is, no one really knows why the market moves one way or another from day to day. Stock investors tend to be forward-looking; consequently, prices are not necessarily responding to today’s news. Or, if today’s news is affecting prices, it’s often something completely unrelated to splashy headlines.

We have made the point a number of times that interest rates impact stock prices. Another important factor is earnings from bellwether stocks such as Amazon, Apple, or Boeing. Sometimes this type of news is buried in the back pages of the paper.

So when you hear the nightly business news, ascribing today’s market move to a tweet, spend a little time looking at earnings reports or Fed announcements, and you might find the real reason the market moved.

Will We Ever Build Housing Like We Used To?

The US has been building far fewer single family homes in this economic cycle than we did from the 1960s to the early 2000s. Part of this is blamed on the Great Recession and its impact on millennial buyers. But there are signs that this is about to change.

Recently, Brookings published a study – one they routinely update – on where millennials are moving (see here ). Migration patterns show some surprising statistics. Both California and New York are experiencing net out-migration; Illinois, New Jersey and Massachusetts are on that list too. Inside the numbers, Sacramento and San Francisco are still drawing the young educated crowd, but overall numbers are down for the Golden State. Portland is a big draw, ranking number seven on the city list. But Minneapolis, Kansas City, and Columbus OH rank 14th, 20th and 12th on the list so it’s not all about coastal cities.

The big winner by a long shot is Texas, with millennials moving to Austin, Houston and Dallas in droves. Houston ranks first in the city list, and Texas ranks number one in the state list with Washington (Seattle) a very distant second. Too, the top winners this time around are nearly the same as just after the Great Recession, but their gains are accelerating.

A common theme among many, though not all, of the destinations for young people is cheap housing. Millennials have been slow to marry, and slow to have children, but that’s starting to change. At the same time, this cohort – one of the largest population bulges the US has ever seen – has a lot of student debt and a lasting impression of what can happen when housing goes bad. If you’re young, just married and not terribly wealthy, what do you do if you want a house? The answer lies in where millennials are moving – and we think it indicates that housing is about to gear upward on a long term basis. Beneficiaries of this move might be housing stocks, but looking at housing related bonds, wood and other building products, and furnishings might be a worthwhile exercise in the next couple of years.

Smart Ways to Save Money

No matter how wealthy you are, it’s worth a little effort to save money on everyday items. Here’s a few ideas to try:

  • If you carry credit card balances, look for a card that offers 0% APR for balance transfers for as long as possible. Capital One and Discover, who won’t let you borrow much by the way, frequently have offers that extend for longer than one year. Mind the fact that these all charge a ‘balance transfer fee’, usually about 3%. Still, if you are paying more than that to carry a balance, 3% sounds pretty good. When you make the transfer, do not use the card for anything else: usually, if you do, you subject the entire balance to a higher charge. With 0% APR, all of your payment goes to reducing your debt, so make your payments as high as possible.
  • Audit your phone bill and your cable bill regularly. Frequently, services ‘show up’ without your explicit permission; even if that’s not the case, you may find that you’re paying for something you never use. Also, call these companies, to ask about a better deal. My internet provider dropped its requirement that I purchase a data line months before I noticed it; this shaved over $20 a month off its cost, and the company was kind enough to back date my bill! Ditto with cable. Here, you may have to play hardball. I’ve found that when I mention that if I can’t get a better deal, I’ll switch to Sling TV, I am transferred to the ‘customer loyalty team’ where they’ll bend over backwards to get me a better deal. Or, you could just switch to Sling anyway.
  • Ask about bundling your home, auto and other insurance if you don’t already. If you do, shop around for a better deal anyway. (Use a broker if this drives you nuts.) Insurance companies hike your rates slowly over time, and it’s possible that your rate has become higher than if you had a new policy from a different provider who is hungrier for your business.
  • When you want to buy something, enforce a 10 day rule: wait 10 days to see if you still really want the item. Often, purchases are impulses, and 10 days on ice is enough to discourage the purchase altogether.
  • Particularly now that short term interest rates have risen, quit keeping excess money in a checking account and look around for a certificate of deposit or at least a money market fund. Talk to your bank to see what they are willing to offer.

For more ideas, simply run an internet search on ‘ways to save money’ and look for something that resonates. In one case, I saw that a couple ditched their Starbucks habit in lieu of buying an expensive but fun coffee machine, and investing in really good coffee. In a short while, making exotic coffee drinks at home paid for itself.

When Will We Know When Stocks Are Done Going Down?

The tough part about predicting the stock market is that it’s not only reacting to what’s happening today, it’s looking forward to tomorrow. And sometimes it’s not exactly tomorrow, it could be six months from now, or twelve months from now. The other tough issue is that the market is going to dish out several good days on the way to completing its bear phase. Those head fakes will tempt some investors to put cash to work.

It’s not a bad thing to miss the first part of an improving trend to make certain that the trend is actually in place. In other words, let’s say you are interested in Apple stock, but it’s been falling every day. One day, it turns around and rises 5 points. Rather than buying right at that moment, it might pay to wait until you can associate the rise with some positive news.

Speaking of news, one sure sign that the market is ready to turn around is that instead of the market reacting as if all news is bad, it starts to rally on bad news. So to take Apple again, let’s say the expectation is that next quarter’s earnings will be down by a dollar, and instead earnings are down only seventy five cents. On the face of it, it’s bad that Apple’s earnings are down. But the market is going to read that as, ‘it’s not as bad as we thought! Buy!’

As far as market action these days, we’ve got small tailwinds going for the economy in lower oil prices and a declining yield on the long bond. Even the ten year yield – which is important for mortgage pricing – is down in yield. But stocks are not going to give us a turn until we see a few earnings reports that show that companies are able to handle higher materials and labor costs and possibly slowing growth. Some relief on the macroeconomic front might help temporarily, but that has to flow through to earnings at some point before investors will pay more for stocks.

Bonds and the Stock Market:

How Do They Talk to Each Other?

It’s no secret that the stock market is unhappy about something – and that there are many things to be unhappy about. However, one item is dominant in our minds, though much less intuitive than trade problems, earnings issues, and the latest tweets. We’ve mentioned interest rates and their impact on stock market valuations many times in the past, but here we will give you a round up of what the bond market is trying to say and how that relates to stocks.

First off, an interest rate is just the price of money. If your bank charges you 5% for a mortgage, that is the price at which they are willing to lend. So with that in mind, what does the price of money have to do with stocks?

Trade issues and tweets have been on the table for months with nary a hiccup in stocks. However, the one incident that can be directly  and immediately tied to the stock market decline is the jump in long term interest rates that began on August 24th. While the long bond shifted up in yield for a week or two in somewhat desultory fashion starting then, it really got going on September 12th, when it broke to the upside and raced to 3.45% from under 3%. This move is both fast and far.

The long bond yield figures large in the valuation of stocks. The higher bond rates are, the lower stocks are valued. On the other hand, higher rates was a positive judgment on the economy, the same as the Fed is broadcasting, which is: things are strong. Competition for money is considerable, and so the market can charge more for those funds.

In some ways, this was comforting. We had the Fed saying, essentially, ‘the economy is still growing and we just want to feather the brakes a bit to avoid a crash so we’ll give you a few rate hikes’, and we had the long bond saying, ‘strength is in the cards, money should be more expensive because demand is strong’. Stocks should like that, but what investors didn’t like was the rapid change. From under 4%, mortgage rates jumped to 5%, and financing for all sorts of transactions shot up, all in about a month.

And then, a funny thing happened on the way to more rate hikes. A few soft economic statistics emerged, showing that housing had cooled considerably, some layoffs were announced, several earnings conference calls contained warnings about next year’s results. These warnings were not relegated to companies that must buy tariff-ridden steel, either. Bank managements, for instance, mentioned housing and the fact that middle market customers have slacked off borrowing again.

In reaction, the trend in the long bond reversed, and its yield began to fall. Rates in the middle of the interest rate curve, from two year to five years, inverted, so that the shorter maturities yield more than the longer maturities.

All of a sudden, the narrative switched from ‘too strong’ to ‘hey wait a second, maybe things are weak! Weaker than we thought!’ And that, right there, was enough to give stocks another leg down.

It’s hard to blame investors for reacting first to the surge in interest rates, and then to their sudden sinking and the inversion of a big hunk of the yield curve. This kind of action in bonds is like a normally soft spoken person suddenly starting to swear and shout. It’s alarming, and now you feel like you no longer know what that person will do next. Consequently, we think it will take some time for volatility in stocks to ease. It will also take a few weeks to determine if the downward direction is a new trend, or just an interruption in the old upward trend. We suspect the answer is the latter, and that we will look back on this time frame as marking the change to a slower growth trajectory, but no disaster.