Key points to remember:
- Consumer goods emerge as a common theme in profit success
- China continues to show economic weakness
- Homebuilders remain positive despite consumer pessimism
Investors have another set of earnings to consider Tuesday. A slew of companies are expected to report earnings this week, including 77 of the 500 stocks that make up the S&P 500. Investors will be looking for signs of supply chain relief and bottlenecks.
So far, a trend among consumer staples seems to be developing as a positive theme, meaning that these important goods are at least hitting the market. Johnson & johnson
(WMT) to its condemnation shopping list.
On the negative side, starting with transportation, the Kansas City Southern Railroad
Despite these reports, a lot of talk revolves around Netflix
China revealed on Sunday that it experienced slower-than-expected economic growth in the third quarter. The country’s gross domestic product (GDP) grew 4.9% from the second quarter of 7.9%. Growth has been hampered by supply chain issues, energy shortages, issues with real estate developer Evergrande and uncertainty surrounding increased regulations and government crackdowns. Nomura analysts cut its fourth-quarter estimate for China from 4.4% to 3%, while ING Bank cut its projection from 4.5% to 4.3%. On the positive side, Chinese exports remain strong and the National Bureau of Statistics reported that Chinese retail sales rose 4.4% in September.
Housing in the United States continues to grow
Home sales continue to rise in the United States despite the Census Bureau reporting lower than expected building permits and housing starts in September. In previous reports, home builders focused on the most profitable multi-family and luxury homes. However, the new report saw a return to single-family homes. On Monday, the NAHB Housing Market Index (HMI) found home builders remain confident despite supply chain disruptions. While confidence has dropped a bit from the start of the year, the HMI still sits above all-time highs dating back to 1985.
Despite positive sentiment from homebuilders, Michigan’s preliminary consumer sentiment index for September was released on Friday and found consumers to be much less bullish. Respondents cited higher prices and supply chain issues as reasons for their bleak outlook. It echoes the Fannie Mae
Building a market: Home builders appear to be immune to rising interest rates. The S&P Homebuilders Select Industry Index ($ SPSIHO) rose along with the 10-year Treasury yield (TNX) and came back above 1.6% this morning. With the 10-year yield correlated to mortgage rates, many investors follow the TNX to keep tabs on mortgage rates. However, rising mortgage rates don’t seem to stop people from building new homes. So why are the two indices so closely related?
There are several reasons. First, emerging from the COVID-19 recession, both indices are enjoying increased demand. There appears to be an increased demand for housing or at least a tight supply that cannot keep up with the demand. And there is an increased demand for borrowing money. So, the demand for housing means the demand for borrowing money.
Second, yields are still historically low. Even though returns have increased, they have fallen from 0.76% to 1.58% in the past year. That’s a nominal increase of 0.82. It’s not even a full percentage point. So while the cost may be higher over the life of the loan, it doesn’t seem to be enough to discourage home buying.
Finally, it is not just ordinary workers who buy houses; many home buyers are in fact professional investors and speculators. In August 2021, The Wall Street Journal reported that private equity firms like BlackRock
This means that it is difficult to know how much of the housing market’s demand comes from “real buyers” and how much comes from investors. It is also difficult to find a similar time period in history to compare to determine whether current investment and construction trends are sustainable.
Leave a door open: Speaking of Opendoor, the stock rebounded by more than 3% following bad news from competitor Zillow. Zillow has announced that it will temporarily stop its automated house flipping operations. According to The Wall Street Journal, the company appears to have overspended on homes that now require more work before they can be sold. Labor shortages are making things more difficult for the housing technology company. However, Opendoor bought almost twice as many homes as Zillow and reported no issues. Zillow traded more than 9% lower on Monday.
Opendoor is not the only competitor focusing on Zillow’s market share. Offerpad Solutions (OPAD) operates a mobile real estate platform that allows consumers to buy and sell homes seamlessly from their phone or tablet. Offerpad hasn’t reported any issues helping homebuyers get the workers they need, either. Perhaps Zillow’s management failed to establish their partnerships.
Frame !: A year ago, random length lumber (/ LB) was trading around $ 550 per contract. During the recovery from COVID-19, it was difficult to obtain wood due to work stoppages and supply chain issues. This pushed the price of lumber to a record high of $ 1,670. But, as more people got back to work and supplies began to move, the price of lumber plummeted and hit a low around $ 458. Lumber has since rallied, and as of Monday it was testing $ 760.
One indicator of the demand for lumber is residential construction. Despite the drop in building permits and housing starts, demand for lumber remains high. Home builders must make tough decisions about which group to focus on. This is a good sign because it reflects a high demand for housing, regardless of who is buying.
TD Ameritrade® commentary for educational purposes only. SIPC member.