Week in Review: November 18, 2022

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Week in Review: November 18, 2022

Housing continues to weaken, while the consumer remains resilient.

 

Market summary

U.S. equities were lower this week, giving back some of last week’s big gains that saw the S&P and Nasdaq both post their best weekly performance since June. Some of the better sector performers this week included insurance and telecoms. Treasuries were mixed, with a big curve-flattening move that saw some inversions hit cycle lows, including the 2-year versus 10-year spread.

This week   

We continue to see weakness in the housing market this week as higher interest rates, and in turn mortgage rates, have significantly reduced housing demand. U.S. homebuilder sentiment continued to worsen for an 11th consecutive month, with the National Association of Home Builders (NAHB) / Wells Fargo Housing Market Index falling five points in November to 33 (see Figure 1). Homebuilder sentiment has declined in every month of 2022 as rising mortgage rates have taken a toll on homebuying affordability and left potential buyers on the side-lines. Excluding the drop in sentiment due to the start of the pandemic, homebuilder sentiment is the lowest since 2012. We don’t expect the trend in homebuilder sentiment to change in the near term; higher rates will continue to weigh on homebuilder sentiment and home sales. 

Later this week, we saw additional signs that the housing market is struggling as U.S. existing home sales continued their decline in October, as the combination of high home prices and high mortgage rates continue to keep potential homeowners out of the market. Existing home sales fell by 5.9%, their slowest pace since the start of the pandemic. Home sales were weak across all regions of the country. We believe home sales will remain under pressure in the medium term, held back by reduced affordability, weaker growth and still-tight supplies. However, the recent moderation in home price growth and the latest decline in mortgage rates could provide slight relief to homebuyers, but to keep the picture in perspective, mortgage payments on median-priced homes are still up by almost 60% since the start of the year.

This week we also saw how resilient the consumer remains as nominal retail sales were up by 1.3% in October (see Figure 2). We saw broad-based gains in spending as 9 of the 13 major retail categories reported an increase in sales between September and October. These broad-based gains highlight the durability of consumer spending amid slowing growth, rising interest rates and negative wealth effects. The strength of underlying retail sales data despite higher borrowing costs is encouraging, but manufacturing is slowly weakening as global growth slows. 

October retail sales suggest that the U.S. consumer is more resilient than we expected earlier this year. If the momentum continues, that could potentially signal stronger growth in the fourth quarter. In the upcoming quarters, the consumer will be challenged, especially if inflation remains high next year. A persistent deceleration in inflation is key to supporting real disposable income, which is the key input for real consumer spending. As we approach 2023, we expect that growth in retail sales will be weak next year. One reason is the ongoing shift away from goods spending and toward spending on services and experiences. Currently, nominal consumer spending on services is ~65% of total consumption. Historically spending on services is closer to ~70%. As spending patterns normalize, we expect that will come at the expense of retail sales/goods.

The larger-than-anticipated increase in nominal retail sales in October won’t change the Federal Reserve’s course from a 50–basis point rate hike at the December meeting of the Federal Open Market Committee. However, the magnitude of hikes in 2023 will likely be milder as the Fed continues to be data dependent and will be closely monitoring the upcoming data for the inflation and employment reports.

Going Forward

Equity and bond market volatility will remain elevated until the future path of inflation and rates is more certain as markets become comfortable with a “data-dependent” Fed that’s now looking at the cumulative effects of rate hikes. We remain defensive in our positioning, and we’d look for opportunities to upgrade portfolios during market weakness. Within equities, we continue to favor U.S. Large Cap exposure, since economic growth is rapidly slowing in Europe, which is close to a recession, and China’s strict COVID policies have weighed on manufacturing and growth. Within U.S. Large Caps, we favor segments exhibiting a defensive tilt toward low volatility, higher quality and shareholder yield. We remain defensive in our credit positioning, with short to at benchmark duration and higher in credit quality. We expect credit spreads to leak wider to account for recession risks.

 

There will be no Week in Review published next week due to the holiday. Have a happy and healthy Thanksgiving!

 

THE WEEK AHEAD

  • October’s preliminary durable orders are expected to rise by 0.3% month over month and will be released on Wednesday. 
  • November’s Michigan Sentiment index is expected to remain unchanged at 54.7 and will be released on Wednesday. 
  • October’s new home sales are expected to decline to 575K and will be released on Wednesday. 
     

Figure 1: Homebuilder sentiment continues to decline as homebuyer affordability declines

Figure 1: Homebuilder sentiment continues to decline as homebuyer affordability declines
Sources: Oxford Economics, Bloomberg, and First Republic Investment Management. Data as of October 2022.

Figure 2: The U.S. consumer remains resilient.

Figure 2: The U.S. consumer remains resilient
Sources: Bloomberg and First Republic Investment Management. Data as of October 2022.

 

Market Returns (USD) as of 11/17/2022

1-Week

Quarter-to-Date

Year-to-Date

1-Year

Global Equities

MSCI All Country World

 
0.9% 10.9% -17.5% -17.6%

S&P 500


-0.2% 10.3% -16.0% -14.5%

Dow Jones Industrial Average


-0.4% 17.1% -6.0% -4.7%

NASDAQ


0.3% 5.5% -28.2% -29.4%

Russell 2000


-1.5% 10.7% -17.1% -21.6%

First Republic Founders Index

 
-0.1% 0.8% -32.1% -33.8%

Russell 1000 Equal Weighted


-0.9% 11.1% -11.8% -12.2%

MSCI EAFE

 
1.7% 14.6% -16.4% -16.9%

MSCI Emerging Markets

 
5.9% 7.7% -21.6% -24.7%

Fixed Income

ICE BofAML Municipals 1-10 Year A-AAA 

0.9% 1.7% -6.1% -5.8%

Bloomberg Barclays Intermediate Government/Credit

0.2% 1.0% -8.7% -8.6%

Bloomberg Barclays High Yield Bond

0.6% 3.6% -11.7% -10.9%

Market Levels

Thursday

Week Ago

Year End

Year Ago

S&P 500


3946.56 3956.37 4766.18 4688.67

Dow Jones Industrial Average

 

33546.32 33715.37 36338.3 35931.05

10-Year U.S. Treasury Yield (Constant Maturity)

3.78% 3.84% 1.51% 1.61%

Gold ($/oz)


$1,760.50 $1,755.62 $1,821.90 $1,867.63

Crude Oil ($/barrel)


$81.64 $86.47 $75.21 $78.36

U.S. Dollar / Euro ($/)


1.03 1.02 1.14 1.13

U.S Dollar / British Pound ($/£)


1.18 1.17 1.35 1.35

Japanese Yen / U.S. Dollar (¥/$)


140.58 141.59 115.16 114.55

Bitcoin Futures ($/XBT)

 
$16,520.00 $17,780.00 $47,977.03 $60,485.00