Thursday, October 22, 2020
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There aren’t enough cars and homes for sale
The Federal Reserve’s latest Beige Book — a collection of economic anecdotes from across the country — highlighted two COVID-19 era trends that continue to fascinate us all: 1) “Residential housing markets continued to experience steady demand for new and existing homes, with activity constrained by low inventories,“ and 2) “Demand for autos remained steady, but low inventories have constrained sales to varying degrees.“
There are a lot of things behind what’s been driving demand. Simply put, the pandemic has motivated people to 1) move out of densely packed cities to places where you can get a stand-alone home and 2) seek alternative modes of travel in an effort to avoid densely-packed, mass-transit options like planes, trains and buses.
“The notion of owning a home in the suburbs, the exurbs, and even in rural areas, is really taking off with the American consumer,” NAHB CEO Jerry Howard said to Yahoo Finance. “I'm talking to builders in Montana who were getting calls from clients that want to build a house, and they're moving there from Southern California. Builders in northern Vermont are getting calls from people in New York City and Boston.”
It’s almost as if the people making those purchases aren’t aware of the macroeconomic risks to their income streams.
“What has been the most astonishing is not only that housing activity grew through the COVID-19 recession – the US consumer’s biggest ticket item – but so did the second biggest ticket item – autos,” Jefferies global equity strategist Sean Darby wrote on Wednesday.
“Scanning through the databases, it is hard to see a period post WWII when the US experienced both low inventories of homes and autos at the same time,” he observed. “Coincidentally, it has occurred around a very deep recession.”
Darby further pointed out “there has been little or no evidence of ‘ticket item’ discounting that would normally be associated with volume growth.“
Quite the contrary. According to the latest S&P CoreLogic Case-Shiller report, home price growth has been accelerating. Meanwhile, the September consumer price index report showed the cost of cars and trucks are rising at a pace we haven’t seen in decades.
We certainly can’t ignore the fact that interest rates are extremely low. According to Freddie Mac data, the average 30-year fixed rate mortgage hit a record low last week.
To be clear, we’re not suggesting this reflects some sort of mania. These aren’t exactly discretionary splurges we’re witnessing. Many of the buyers are motivated by their own health and safety, in which case these decisions are arguably non-discretionary.
All that said, Darby offered some thoughts for his clients.
“There are two gratifying points from an investment point of view,” he wrote. “Firstly, for investors who thought COVID-19 was solely about the FAANG and technology stocks, the unloved, value parts of the equity market were experiencing ‘stealth sales’ at the peak of the virus outbreak. Secondly, top line demand was not dependent on overseas sales. This recovery has been a ‘pure domestic one’.“
And so these unusual times are making for potentially overlooked investment opportunities.
Among other things Darby argues “the wind is behind the sails” of materials sector stocks.
What to watch today
8:30 a.m. ET: Initial Jobless Claims, week ended October 17 (870,000 expected, 898,000 during prior week)
8:30 a.m. ET: Continuing Jobless Claims, week ended October 10 (9.625 million expected, 10.018 million during prior week)
10:00 a.m. ET: Leading Index, September (0.6% expected, 1.2% in August)
10:00 a.m. ET: Existing Home Sales, September (6.3 million, 6.00 million in August)
11:00 a.m. ET: Kansas City Federal Reserve Manufacturing Activity Index, October (11 in September)
6:00 a.m. ET: Dow Inc. (DOW) is expected to report adjusted earnings of 33 cents per share on revenue of $9.47 billion
6:20 a.m. ET: AllianceBernstein Holdings (AB) is expected to report adjusted earnings of 68 cents per share on revenue of $898 million
6:30 a.m. ET: Southwest Airlines (LUV) is expected to report an adjusted loss of $2.35 per share on revenue of $1.70 billion
6:45 a.m. ET: Quest Diagnostics (DGX) is expected to report adjusted earnings of $3.72 per share on revenue of $2.72 billion
6:55 a.m. ET: Coca-Cola (KO) is expected to report adjusted earnings of 57 cents per share on revenue of $8.4 billion
7:00 a.m. ET: American Airlines (AAL) is expected to report an adjusted loss of $5.86 per share on revenue of $2.86 billion
7:00 a.m. ET: Sirius XM Holdings (SIRI) is expected to report adjusted earnings of 6 cents per share on revenue of $1.94 billion
7:05 a.m. ET: AT&T (T) is expected to report adjusted earnings of 75 cents per share on revenue of $41.66 billion
7:05 a.m. ET: Citrix Systems (CTXS) is expected to report adjusted earnings of $1.25 per share on revenue of $758.73 million
7:30 a.m. ET: Kimberly-Clark (KMB) is expected to report adjusted earnings of $1.74 per share on revenue of $4.59 billion
8:00 a.m. ET: Alaska Air Group (ALK) is expected to report an adjusted loss of $2.94 per share on revenue $683.86 million
8:00 a.m. ET: Union Pacific (UNP) is expected to report adjusted earnings of $2.05 per share on revenue of $4.94 billion
4:00 p.m. ET: Intel (INTC) is expected to report adjusted earnings of $1.10 per share on revenue of $18.22 billion
4:05 p.m. ET: Capital One Financial (COF) is expected to report adjusted earnings of $2.19 per share on revenue of $6.70 billion
4:05 p.m. ET: Mattel (MAT) is expected to report adjusted earnings of 39 cents per share on revenue of $1.46 billion
Stalled US stimulus and rising COVID-19 cases knock markets [Yahoo Finance UK]
Quibi shuts down: Why the $1.75 billion streaming app failed [Yahoo Finance]
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