The Market Narrative is Changing

Stocks opened higher this morning despite higher unemployment insurance claims (see below). Currently the Dow is up 118 points and the S&P 500 is up .4%. The VIX Index, measuring fear among stock traders, has fallen back under 14, which is considered pretty low. Are traders finally letting their guard down, or is it sinking in that perhaps the market isn’t about to plunge back to 2022 lows?

Judging from recent trading activity, bond investors are a little more positive on the economy’s trajectory. Not so long ago the bond market was predicting a sharp economic slowdown in the back half of this year brought on by Fed interest rate hikes. As recently as a month ago, the highest yielding Treasury bill paid 5.35% and matured in only one month, whereas the 2-year paid only 4%. Traders were betting that plunging economic growth (and inflation) would force the Federal Reserve to reverse course this summer and begin aggressively cutting its policy interest rate. But now those same traders are revising expectations. The 1-month T-Bill yield has settled to 5% but the 2-year is up around 4.5%. In other words, the near-term outlook isn’t as dire. I can almost hear the Fed say, “I told you so.” Fed officials have stubbornly adhered to the view that 1) interest rates would have to remain elevated for a while in order to knock down inflation, and 2) the economy can probably handle that. Are bond traders slowing coming around to that view?

According to the Federal Reserve, total US household net worth rose in the first quarter by 2.1% (or $3 trillion) on stock market gains. Debt was up by 2.2%, considered modest. Real estate values declined a bit, but equity held in real estate is still higher than pre-pandemic levels. Assets held in money markets (i.e. cash) rose to $3.3 trillion, which is a record. CNBC reporter Steve Liesman says this this is one reason why the US economy is not in a recession.

Initial filings for unemployment insurance climbed last week to 261,000 from 233,000 in the prior week. That’s the highest weekly tally since October 2021. Of course, every economist is glued to these reports because they are thought to give the first signal of a job market slowdown. And it is true that jobless claims have been trending gradually upward since last Fall. We do expect some uptick in the unemployment rate in coming months. But we need to keep this data in perspective. Only about 1.2% of the workforce is collecting unemployment insurance. And the BLS says there are 10 million open job positions out there.

The CEO of Equity Residential (EQR) says housing in the US is “expensive, and under-supplied.” Inventory of for-sale residential properties remains low partly because current homeowners with low mortgage rates are hesitant to sell. He also cited some regulatory pressure in specific areas. For example, the “Manchin Tax”, a 5% transfer levy in Los Angeles County, is depressing sale activity. Of course, there are some areas in which occupancy is declining and rents are falling, such as the Sun Belt. But even in San Francisco, he says his company’s rentals have maintained occupancy at about 95%. Occupancy may be holding up, but According to Zillow rents in California are now falling. The median rent of $2,900 is down about 4% over the last year.