Slow Motion Correction Continues

Stock market indexes sank at the open (Dow -500 pts; SPX -2%), led by semiconductors, internet and biotech. Only the energy sector is nursing a modest gain despite WTI crude oil falling back to $75/barrel. The S&P 500 is now 4% off of its record intraday high on 9/2. Commodities are trading lower as well today (gold -.6%, copper -.5%). The bond market continued to fall back in response to both Federal Reserve policy expectations (see below) and yet another debt ceiling fight in congress. Over the past week the 10-year Treasury Note yield has climbed to 1.52% from 1.30%.

During congressional testimony, Federal Reserve Chair Jerome Powell said the Fed is just about ready to begin gradually reducing its bond-buying program. Such a “tapering” would represent the first step in discontinuing monetary stimulus. It also reflects Fed confidence that the economy has substantially healed from the Covid Crisis. It may also signal some level of concern that rising inflation could be exacerbated by continued stimulus. I think most market watchers agree that we can’t—and don’t need to—continue printing & spending money at such a furious pace. On the other hand, the Wall Street Journal wonders “how well the market will be able to stand on its own once the Fed begins to taper…”

US home prices jumped nearly 20% in July from year-ago levels. That’s the fastest increase in more than 30 years. Several key factors are at work here. Since the Housing Crisis, homebuilders have failed to keep pace with population growth. So there’s a shortage of supply. At the same time, massive monetary stimulus from the Fed suppressed mortgage rates and pushed up asset prices. Fiscal stimulus—enhanced unemployment benefits, direct payments to consumers, the Covid foreclosure moratorium—kept American families in pretty good shape through the Covid recession. And, at least anecdotally, Covid spurred a relocation wave to suburbs and semi-rural areas. The long-term average annual price growth for US homes is around 5%, so one could be forgiven for wondering if home prices are forming a bubble. The Wall Street Journal quoted an economist at Oxford Economics, who echoed what we’re all thinking: “This has to stabilize at some point.”