Waiting on the Fed

Stocks fell at the open but quickly turned around. The Dow and S&P 500 are roughly flat. WTI crude oil is hovering around $85/barrel. The bond market is mixed in early trading. Treasuries are catching a bid, whereas higher risk junk bonds are selling off. We’ll likely see elevated (but rangebound) volatility in all asset classes leading up to the Federal Reserve’s policy announcement scheduled for Wednesday afternoon. Traders, fixated on the ultra-short term, are placing bets as to whether the Fed raises its policy interest rate by .50%, .75%, or 1.0%. Investors, on the other hand, will pay more attention to the Fed’s statement regarding the future path of interest rates. It is generally thought that the Fed intends to push its rate from 2.5% currently, to about 4% during the first half of 2023. The real question is whether they’ll be sensitive to slowing economic growth and perhaps pause short of 4%.

The National Assn. of Homebuilders’ (NAHB) sentiment survey deteriorated again this month and is now at its lowest level since May 2020. Rising mortgage rates along with high home prices and slowing economic growth are beginning to take a toll on home sales. At the same time, homebuilders are facing lower profit margins due to high construction costs. This confluence of factors has resulted in what NAHB calls a “housing recession.” The rate of new home sales is down nearly 30% since the beginning of the year. So why are Wall Street analysts getting more constructive on homebuilders? First, shares Lennar (LEN), DR Horton (DHR) and Toll Brothers (TOL) are trading more than 30% down from peak levels. A lot of risk has already been priced-in. Second, demographics is playing a part. Millennials are now reaching their prime home-buying years. Third, we’re dealing with a structural under-supply of housing that can be directly traced back to the 2008 Great Financial Crisis. And finally, as KeyBank analyst Ken Zener point out, homebuilder stocks tend to recovery very quickly as economic cycles bottom out.

Analysts are warming to Netflix (NFLX). The stock fell more than 70% earlier this year as subscriber growth crashed. That fall from grace arguably priced-in a worst-case scenario for Netflix which is probably unrealistic. Since June the stock has cautiously pushed higher. Oppenheimer’s Jason Helfstein says the stock will outperform the overall stock market in the next year. He’s optimistic that the company’s new ad-supported model will reaccelerate subscriber growth. Netflix has the highest viewership among all streaming services, which makes it attractive to advertisers.