Monday Market Update 10-25-2021
The stock market soared last week, closing at an all-time high on Thursday as Q3 earnings season surpassed most expectations. We also got an update on the housing market, with housing starts and existing home sales – what does it tell us about the health of the housing market and home prices? Catch all the details below for this week’s Monday market update or listen on this week’s episode of Finance Explained.
Last Week in the Market
Last week the stock market soared as Q3 earnings surprises – companies reporting earnings ABOVE analysts’ expectations – fueled market gains. On Thursday, the S&P 500 closed at an all-time high, trading off just slightly Friday, to end the week up +1.6%. The market is now up +5.5% for the month of October, and +21% for 2021 year to date, despite September’s sell-off.
The yield on 10-year Treasury bonds also continues its climb. Across the yield spectrum, from 3 month T-bills to 30-year Treasury bonds, rates are rising in October. This is likely due to two things 1) the Fed’s more solid commitment to begin to ramp down accommodative monetary policy. We will get more clarity on that following their next FOMC meeting next week, but the expectation is they will begin to slow monthly asset purchases (recall, they are currently purchasing $120 billion in Treasury bonds and mortgage-backed securities monthly) next month. It’s also due to inflation expectations. The Fed is acting due to inflation expectations and market interest rates are rising because of investor inflation expectations.
We can see this most clearly in the spread between 10-Year Treasury rates and 10-Year TIPS, or Treasury Inflation-Protected Securities. The spread in rates between the two reflects investors’ expectations for inflation over the next 10 years. Historically, it has hovered at or below 2%, in-line with the Fed’s long-term inflation target. Last week, it hit its highest level since 2006 – 2.66%,
In general many of the market trends we’ve seen all year, continue. Commodities, driven by inflationary pressures, continue to dramatically outperform, up +47% year to date. Higher risk, higher multiple stocks, like growth, small cap and the tech-heavy Nasdaq continue to exhibit more volatility and underperformance in the face of a rising interest rate environment, while value stocks and real estate outperform. So far in October, the S&P 500 is up +5.5%, while the Nasdaq is up just 4.5%, the Large Cap Value Index is up 5.6% and Vanguard Real Estate Index is up +7.1%.
While we are still waiting on concrete details on the budget reconciliation negotiations from Congress, last week we got a housing market update, with data on:
- Tuesday – Housing Starts for September
- Thursday – Existing Home Sales for September
We also got the usual Thursday Weekly Jobless Claims data, for the week ended October 16, 2021. More on all these stories below or get the full update on this week’s episode of Finance Explained.
Q3 Earnings Season
The biggest driver of earnings season this week is definitely the strong start to earnings season. So far, 23% of S&P 500 companies have reported Q3 earnings. Of those, 84% have beat analyst earnings expectations so far. The record? 87% just last quarter.
On average, companies reporting have beat earnings estimates by more than 13%, with the biggest earnings surprises happening in the financial sector due to non-recurring reserves for losses being released and higher trading revenues.
Going forward, analysts expect revenues growth to outpace earnings growth in 2022, and have less growth than this year. This is likely due to inflationary pressures and companies’ ability to pass on higher costs in the form of price increases, as well as competition for consumer dollars as student loan forbearance ends. The stock market trades based on company earnings and earnings growth: if inflation erodes earnings growth expectations, we could see increased volatility in the stock market as we head into 2022.
All of the Q3 earnings data is based on the 23% of S&P 500 companies who reported through the end of last week. Over 100 more will report this week. Stay tuned!
Weekly Jobless Claims for 10/16/2021: 290,000 new claims
Weekly jobless claims fell under 300,000 for the second consecutive week.
For the week ended October 16th, new initial jobless claims were 290,000. Continued claims for the week ended October 9th declined slightly to 2.5 million, a 1.8% insured unemployed rate, down 0.1% from the week prior.
Next Data Point?
Weekly jobless claims are released by the Dept. of Labor every Thursday
September 2021 Housing Starts: 1.6 million starts, +7.4% YOY
For the month of September 2021, housing starts were 1.6 million on a seasonally adjusted annual basis. This was down -1.6% vs. August, but up +7.4% vs. September 2020. For the last several months, we are finally seeing starts consistently above the long-term median, after more than a decade of under-construction following the Great Recession.
This lack of new construction is one of the major contributor to the current housing supply shortage – and will take years of sustained starts at current levels to overcome the shortfall.
In addition to starts, the New Residential Construction monthly report also report building permits authorized as well as housing completions. Permits were flat year-over-year, but we are starting to see completions lag further and further behind. This is likely due to supply chain constraints – builders can’t finish homes without supplies, and lead times on major construction components continue to lengthen.
Next Data Point?
October New Residential Construction report is due out November 17, 2021
September 2021 Existing Home Sales: +7% from August
The National Association of Realtors released data on existing home sales last week. After some concern the market may be slowing based on August sales, Existing Home Sales, in terms of actual homes sold, were up +7.0% in September on a seasonally adjusted annual basis vs. the month prior.
The median sales price for existing homes, while down relative to recent months, is still up double digits over the last year: +13.3%. Inventory constraints continue to be an issue. A normal housing market typically sees 4-6 months worth of inventory. This means there are enough homes listed for sale to fulfill 4-6 months worth of sales. Currently, there is just 2.4 months supply based on existing listings. Listings are down -13.4% vs. a year ago.
It is this extremely limited supply, likely fueled by the under-construction of the last decade, against elevated demand, fueled both by demographic trends and low-interest rates, that continues to support higher home prices.
While price growth has definitely slowed and in some cases even come down a bit in recent months, price data is not adjusted for seasonality. And this trend is consistent with historical seasonal trends. Prime selling season is March – August, and Fall and Winter months typically sees the real estate market slowdown and prices with it.
Next Data Point?
Existing Home Sales for October is due out November 22, 2021
Mortgage Rates: 3.09% for 30 Year, up +0.04% vs. week prior
As market interest rates, so do mortgage rates.
According to Freddie Mac’s weekly Primary Mortgage Market Survey, 30-year mortgage rates are now solidly in 3% territory for the second week in a row. Last week, the survey reported average 30-year rates at 3.09% with 0.7% fees for points (where people pay to buy down their rate). For a 15-year mortgage, average rates are currently 2.33% with 0.7% points.
The Fed’s asset purchase tapering directly impacts the mortgage market. They have been buying $120 billion in assets, including $80 billion in treasury bonds and $40 billion in mortgage-backed securities, every month for over a year now. That has held rates lower than they otherwise would be as they act as a major buyer in the MBS market. I fully expect mortgage rates to continue to rise going forward, which could temper demand in the housing market and slow price appreciation this Spring.
Pandemic Update
Good news on the pandemic front continues. New cases are down over 56% since the start of September, with new daily deaths declining as well. The rate of hospitalizations and deaths, relative to new cases, also continues to decline.
Vaccinations also continue to increase, albeit more slowly than last spring. Currently, over 77% of those over the age of 12 (the eligible population) have received at least 1 dose. I should also note the CDC is now also tracking and reporting booster shots, though not everyone is currently eligible for boosters.
The FDA has been busy reviewing boosters for both J&J and Moderna, as well as expanding access for children under 18 to Moderna. Last week, the FDA approved mixing and matching of boosters, as well as approved the Modern and J&J boosters. Who is approved for what varies depending on the vaccine – this flow chart does a good job of mapping out eligibilities.
This week, the FDA is reviewing the Pfizer vaccination for children ages 5 to 11.
Next Data Point?
CDC tracks and reports pandemic data daily via the CDC Covid Data Tracker
This week in the markets, we will continue to watch the progress in Congress on the Senate’s budget reconciliation, aka the $3.5 trillion spending bill. On the economic front, it’s a big week towards the end of the week and month…
- Thursday – Weekly Jobless Claims and Q3 2021 GDP
- Friday – Personal Income and Outlays, incuding the PCE Price Index
In addition to those, Q3 earnings season continues, with over 100 companies reporting.
Questions about this week’s update or recent financial headlines? Tune in to Live Q&A with Family Finance Mom every Monday and Wednesday at 9AM ET on Instagram. Look for the question box in stories to leave your questions, or watch and ask them live.