November 2023 - U.S. Home Prices

The very big picture (a historical perspective):

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths-out shorter-term earnings swings in order to get a longer-term assessment of market valuation.  A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that further increases in market prices only occur as a general response to earnings increases, instead of rising “just because”).  The market was recently above that level and has fallen back.

Of course, a “mania” could come along and drive prices higher - much higher, even - and for some years to come.  Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind - as buyers rush in to buy first, and ask questions later.  Two manias in the last century - the “Roaring Twenties” of the 1920s, and the “Tech Bubble” of the late 1990s - show that the sky is the limit when common sense is overcome by a blind desire to buy.  But, of course, the piper must be paid, and the following decade or two were spent in Secular Bear Markets, giving most or all of the mania-gains back. 

 The Very Big Picture: 123 Years of Secular Bulls and Bears

Figure1

See Fig. 1 for the 100-year view of Secular Bulls and Bears.  The CAPE is now at 29.50, up from the prior week’s 28.14.  Since 1881, the average annual return for all ten-year periods that began with a CAPE in this range has been slightly positive to slightly negative (see Fig. 2).

The Very Big Picture: Historical CAPE Values

Current reading: 29.50

Figure 2

Note:  We do not use CAPE as an official input into our methods.  However, if history is any guide - and history is typically ‘some’ kind of guide - it’s always good to simply know where we are on the historic continuum, where that may lead, and what sort of expectations one may wish to hold in order to craft an investment strategy that works in any market ‘season’ … whether the current one, or one that may be ‘coming soon’!

The big picture:

As a reading of our Bull-Bear Indicator for U.S. Equities (comparative measurements over a rolling one-year timeframe), we entered a new Cyclical Bull on April 21, 2023.


The complete picture:

Counting-up of the number of all our indicators that are ‘Up’ for U.S. Equities (see Fig. 3), the current tally is that two of the four are Positive, representing a multitude of timeframes (two that can be solely days/weeks, or months+ at a time; another, a quarter at a time; and lastly, the {typically} years-long reading, that being the Cyclical Bull or Bear status).

In the markets:

U.S. Markets:  The major indexes finished the week in the green, as the S&P 500 Index recorded its strongest weekly gain in nearly a year. Growth stocks and the technology-heavy Nasdaq Composite Index outperformed somewhat, but the gains were led by the small-cap Russell 2000 Index. The Dow Jones Industrial Average finished the week at 34,061, a gain of 5.1%. The technology-heavy NASDAQ Composite advanced 6.6% to 13,478. By market cap, the large cap S&P 500 grew by 5.9%, while the mid cap S&P 400 gained 6.5%. The small cap Russell 2000 ended the week up 7.6%. For the month of October, the Dow and Nasdaq pulled back -1.4% and -2.8%, respectively. By market cap, the S&P 500 shed -2.2%, mid-caps fell -5.4%, and small caps retreated -6.9%.

International Markets:  International indexes finished the week in the green as well. Canada’s TSX advanced 5.8%, while the United Kingdom’s FTSE 100 rose 1.7%. On Europe’s mainland, France’s CAC 40 and Germany’s DAX climbed 3.7% and 3.4% respectively. In Asia, China’s Shanghai Composite ticked up 0.4%. Japan’s Nikkei gained 3.1%. As grouped by Morgan Stanely Capital International, developed markets increased 5.8%. Emerging markets grew by 5.3%. October was a difficult month for international markets. Canada and the UK declined -3.4% and -3.8%. France and Germany retreated -3.5% and -3.7%. China and Japan declined -2.9% and -3.1%. Developed markets finished the month down -2.9%. Emerging markets fell -3.3%.

Commodities:  Precious metals finished the week in the green as Gold rose 0.04% to $1999.20 per ounce, while Silver increased 1.74% to $23.29 per ounce. Oil finished the week to the downside. West Texas Intermediate crude oil closed at $80.51 per barrel, a drop of -5.88%. The industrial metal copper, viewed by some analysts as a barometer of world economic health due to its wide variety of uses, ended the week up 0.97%. Precious metals finished mixed for the month of October. Gold gained 6.90%, Silver rose by 2.20%, copper lost -2.40%, and oil retreated -10.80%.

U.S. Economic News:  U.S. home prices rose for the sixth consecutive month. The S&P CoreLogic Case-Shiller 20-city house price index rose 1% from July to August. Year-over-year, home prices were up 2.2% in the 20 major metro markets in the U.S., while the national index rose 2.6% over the past year. For the month of August, Chicago posted the strongest year-over-year home-price gains at 5%. New York and Detroit trailed closely behind at 4.98% and 4.8% respectively. The West lagged behind the rest of the country as home prices in Las Vegas and Phoenix fell -4.9% and -3.9% year-on-year. Managing director at S&P DJI, Craig J. Lazzara said, “On a year-to-date basis, the National Composite has risen 5.8%, which is well above the median full calendar year increase in more than 35 years of data.” He added that, “The year’s increase in mortgage rates has surely suppressed housing demand, but after years of very low rates, it seems to have suppressed supply even more.”

U.S. consumer confidence fell to a five-month low in October, according to the Conference Board. Their index dropped from 104.3 in September to 102.6 last month. High prices and pessimistic views on economic conditions weighed on sentiment. Buying plans eased, as the number of consumers expecting to buy a car, a home or major appliances dropped off. However, the number of people planning for vacations over the next six months is the highest since 2020. “Consumers continued to be preoccupied with rising prices in general, and for grocery and gasoline prices in particular,” said Dana Peterson, chief economist at the Conference Board. “Consumers also expressed concerns about the political situation and higher interest rates,” she added.

The Institute for Supply Management reported that their manufacturing index dropped to its lowest level since July. According to the ISM, the index fell 46.7% last month, which was below economists’ forecast of 49.2%. Thirteen manufacturing industries reported contraction, while only two reported growth. Production and employment weakened in October, alongside new orders. Manufacturing was starting to rebound in June, but economists said that higher interest rates caused firms to pull back capital spending plans. Timothy Fiore, chair of the ISM’s factory survey committee said the tight Federal Reserve monetary policy could be playing a role in reducing investment spending. "New orders are not there. That's a concern," Fiore said.

The Federal Reserve held interest rates steady this week. Policymakers struggled to determine whether financial conditions were tight enough to control inflation, or whether the economy required more restraint. Federal Reserve Chairman Jerome Powell said U.S. central bank officials were willing to raise rates again if progress on inflation stalled but were wary that a rise in market-based interest rates may significantly weigh on the economy. In a press conference, Powell said it was better to maintain the Fed’s benchmark overnight interest rate in the current 5.25%-5.50% range and monitor job and price data between now and the policy meeting in December. "We're not confident that we haven't, we're not confident that we have reached that sufficiently restrictive plateau,” Powell said. "Inflation has been coming down, but it's still running well above our 2% target ... A few months of good data are only the beginning of what it will take to build confidence,” he added.

U.S. jobless claims climbed marginally, but layoffs remained low. Initial jobless claims rose by 5,000 to a seasonally adjusted 217,000 last week. Unadjusted claims grew by 2,768 to 196,767. According to the Labor Department’s weekly jobless claims report, unemployment rolls increased to a six-month high. Economists were divided on whether this was an indication of material change in the underlying trend. “The sustained increase in continuing claims since Labor Day appears to be a seasonal adjustment phenomenon, as a similar upswing occurred last year," said Lou Crandall, chief economist at Wrightson ICAP in New York. "We would not give any weight to the increase at this point. It seems likely to be revised away in next spring's annual revisions,” Crandall added. Meanwhile, the number of people receiving benefits, after an initial week of aid, rose by 35,000 to 1.818 million. This marked the highest level for continuing claims since mid-April. "The rise in continued claims, if sustained, would be a sign of a further loosening in conditions in the labor market," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics.

The U.S. added 150,000 new jobs in October. Employment increased by 99,000, excluding the government. Public-sector jobs grew by 51,000 last month. Health-care providers created nearly half of all the new private-sector jobs. Employment also rose in construction, leisure and hospitality, social work, and professional occupations. Labor costs rose modestly in October. Average hourly wages increased 0.2%. Economists say employment would have grown by 180,000 if not for the auto workers’ strike. Manufacturers showed a decline of 33,000 jobs, due primarily to the United Auto Workers strike against GM, Ford, and Stellantis. “Today’s report suggests that the job market is, in fact, slowing. September seems to have been just a momentary upward blip in the jobs numbers,” said Seema Shah, chief global strategist, at Principal Asset Management. “This jobs report further increases the chances of no [Fed] move in December,” Shah added.

International Economic News:  Canada’s economy stalled in August and likely slipped into a recession in the third quarter. The central bank’s 10 interest rate hikes since 2022 have weighed down economic growth. According to Statistics Canada, GDP was revised to being marginally negative from an initial report of zero growth in July. "Whether or not the economy is already in recession is less important than the fact that the lagged impacts of monetary policy are likely to materially depress economic activity moving forward," said Tiago Figueiredo, an economist at Desjardins. The statistics agency said high interest rates, inflation, forest fires and drought conditions hindered economic growth in August. The central bank said its prior rate hikes are sinking in. "Given the fact that Canada has yet to feel the full impact of prior rate hikes, there's still more downside risk ahead for the economy," Benjamin Reitzes, macro strategist at BMO Capital Markets, wrote in a note to clients. "This is yet one more crystal-clear sign that the Bank of Canada should be done hiking," Reitzes added.

The Bank of England held interest rates at a 15-year high. The Bank Rate remained at 5.25% for the second consecutive meeting after 14 back-to-back rate increases. The BoE published forecasts that the British economy is skirting close to a recession. "Regarding the Bank of England, the projections paint a picture of stagflation, and signal the next move to be a cut in the base rate rather than a hike. However, investors will need to deal with the fact that inflation will not revert to 2% until 2025. That means that the long part of the yield curve will remain vulnerable to a bull steepening, as the BoE is forced to remain on hold,” said Althea Spinozzi, senior fixed income strategist at Saxo Bank in Copenhagen. “The risk the BoE is running into is that, if at the next projections there is the need to revise inflation up again, that will need to be brought together with another interest rate hike. That would kill the central bank's credibility at the cost of sterling,” Spinozzi said.

On Europe’s mainland, German unemployment surpassed economists’ expectations in October. According to figures from the Federal Labour Office, the number of people out of work increased by 30,000 in seasonally adjusted terms to 2.678 million. "For a good year now, the German economy has more or less been treading water," said Andrea Nahles, chairwoman of the Federal Employment Agency. The seasonally adjusted jobless rate grew to 5.8% last month from 5.7% in September. The Federal Labour Office said there were 749,000 job openings in October, 98,000 fewer than in 2022. Germany’s manufacturing Purchasing Managers Index (PMI) showed a solid reduction in factory workforce numbers. "Yet, when comparing to previous recessions, the current job scenario seems relatively favorable given the overall situation in the manufacturing sector," said Cyrus de la Rubia, Hamburg Commercial Bank (HCOB) chief economist.

GDP growth slowed and inflation eased in France. The French economy grew 0.1% in the third quarter, according to preliminary data from France’s official statistics agency, INSEE. Household consumption rose 0.7%, while INSEE data showed inflationary pressures in the EU’s second-largest economy eased. “The upturn in household growth is good news. It drove growth in the third quarter," Finance Minister Bruno Le Maire said. Le Maire added that recent trends of easing inflation would allow France to achieve its 2024 growth target of 1.4%. ECB policymaker and French central governor Francois Villeroy de Galhau said inflation has passed its peak in France. "Our monetary policy must now be guided by confidence and patience: confidence that we are making firm progress towards bringing inflation down to 2% by 2025; patience in stabilizing interest rates at their current level for as long as is still necessary,” the French central bank governor said.

In Asia, factory activity across the board declined last month. Purchasing managers’ indexes (PMIs) for factory powerhouses China, Japan, and South Korea showed lower activity. Vietnam and Malaysia were also affected by the slowdown in China. Manufacturers in Asia faced worsening pressure in October as China’s recent recovery retreated, clouding recovery prospects for the region’s major exporters hurt by weaker global demand and higher prices. China’s Caixin/S&P Global manufacturing PMI fell into contraction from 50.6 to 49.5 in October. "Overall, manufacturers were not in high spirits in October," said Wang Zhe, an economist at Caixin Insight Group. "The economy has showed signs of bottoming out, but the foundation of recovery is not solid. Demand is weak, many internal and external uncertainties remain, and expectations are still relatively weak,” Wang Zhe added. Japan and South Korea, whose manufacturers are reliant on demand from China, were affected by the recent slowdown as well. Japan’s factory activity shrank for the fifth consecutive month in October, according to the final au Jibun Bank PMI. Japan’s factory output rose in September but remained below economists’ expectations as demand slowed heavily. Japanese machinery makers like Fanuc and Murata Manufacturing reported weak six-month earnings due to weak demand from China. "The October PMIs for emerging Asia generally dropped back further inside contractionary territory," said Shivaan Tandon, emerging Asia economist at Capital Economics. "The outlook for manufacturing in the region remains bleak in the near term as elevated inventory levels and weaker foreign demand are set to curtail production,” Tandon added.

Finally: While 78% of Americans only speak English, between 350 and 430 languages can be found in the U.S. Spanish is the second most spoken language at 62%. German immigrants constituted one-third of the population of American colonies in the mid-18^th century and played a significant role in early American society. Consequently, over 40 million Americans claim German ancestry and German now stands as the third most prevalent language in thirteen states. In the Midwest, French stands as the most spoken language (excluding English and Spanish) in four major cities. France played a pivotal role in the American Revolution. Over two centuries later, nearly 9.4 million people in the U.S. claim French or French-Canadian ancestry. In Chicago, the largest city in the Midwest, Polish is the third-most spoken language. 45% of all U.S. Asians live in the American West, making Asian languages the most spoken in many cities, after English and Spanish. Tagalog is the most spoken language in nine cities, ranging from Anchorage, Alaska, to Las Vegas. In California and Washington, Chinese is the dominantly spoken language, while Japanese is the third most common in Hawaii. While numerous languages across America flourish, some face extinction. According to the National Congress of American Indians, over 90% of surviving Native American languages are at risk of extinction by 2050. Visual Capitalist’s Bruno Venditti and WordFinderX created a graphic based upon Census data to elucidate the most spoken languages (aside from English and Spanish) in American neighborhoods.

(Sources:  All index- and returns-data from Norgate Data and Commodity Systems Incorporated; news from Reuters, Barron’s, Wall St. Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet.)