Look out below! Choppy markets, investor queasiness
Hello, friends. As July wraps up, I hope this finds you feeling strong in every sense — I think you’ll need some fortitude because, from where I stand, we may be in for a bit of a bumpy ride in the coming weeks.
But don’t take my word for it — take a look at this snapshot from Wednesday, July 28:
By the time you read this things could look vastly different (such is the nature of the markets, where every moment makes a difference). Still, as I look out on the horizon, here’s why I feel a little uneasy.
Stock markets
As I write this, there are several highly anticipated events this week:
The Federal Reserve is due to give a policy update on Wednesday
We should hear outcomes regarding second-quarter gross domestic product (GDP)
Earnings reports are out now (or will be this week) for many major tech companies — including Apple, Microsoft and Alphabet/Google, which came out on Tuesday, July 27 — and other big players.
How’d they do? Per MarketWatch:
“Apple Inc….shares slipped...in premarket trading after the iPhone maker said profit nearly doubled, but also projected a growth slowdown.”
“Microsoft Corp...shares rose 0.8% after the software giant topped $60 billion in annual earnings for the first time at the end of a record-breaking year.”
“Alphabet Inc. stock jumped over 3% after the Google parent reported strong advertising sales that sent revenue and earnings well past analysts’ estimates.”
The markets tend to react strongly to the quarterly reports, which I think is somewhat misguided. In my experience, it really comes down to the differences between trading or investing (whereas “trading” is a method focused on picks for quicker gains and “investing” is a long-term, buy-and-hold strategy to build wealth) and how you use the earnings information:
Earnings reports are subject to massive regulatory compliance and, for that reason, companies tend to underplay the anticipated results in the days and weeks leading up to the releases.
Earnings news makes its way into the markets before the formal reports are released so by the time the actual reports are out, I liken them to fool’s gold.
They’re a look back and while great products, services, management and reinvestment over prior quarters may bolster the odds of getting the same in the coming quarter, that’s often not the case for a slew of reasons.
In my opinion, the reports aren’t the best tool for trading, at least not in and of themselves. Perhaps more appropriately, then, they should only be one tool driving investor decisions.
Another issue that could be unsettling in the markets is the emergence of new regulatory challenges in China and the impact on major players, including Tencent and Alibaba. The crackdowns certainly make these investments less enticing, but the real question is what sort of lasting, broader impact this will have on the major indices, if any.
Regarding the other elephant in the room, Covid-19, I won’t spend much time on the Delta variant; still, there’s no escaping the fact that it’s having impacts on the markets.
If you’ve read the last few posts, you know my frustrations and they’re playing out in regions that are seeing upticks. And on Tuesday morning as I started to draft this post, the CDC stepped back a bit from the “no masks needed for the vaccinated” messaging.
This news is disconcerting across asset classes and if you watch stocks that soared or tanked during the last year or so, you’ll see rises and dips now that mimic last spring’s reactions to the lockdowns.
The major issue now is that we can’t go through that again. We can’t do it physically and economically, locking down businesses and schools and institutions. Nor can we do it psychologically, going through the separation and uncertainty again.
Here’s a look at Deutsche Bank’s monthly market-sentiment survey (via MarketWatch):
Residential real estate
How’s residential real estate faring through all this uncertainty?
Overall, there’s a slight softening in most markets — a combined result of more inventory becoming available, some pent-up purchasing frenzy dying down and a lack of buyers who can afford homes with such extreme valuations, even with interest rates still incredibly low. In some geographic and price-point arenas, this means that prices aren’t rising as quickly and in others, it means there’s emerging evidence of prices dropping a bit. (I don’t have hard statistics but you can look online and see that many sellers are now reducing original listing prices, which is one of the clearest early signs of softening.)
As reported in Yahoo! Finance, “The median home price for a new home rose around 6% compared with the previous month’s gains as high as 15-20%. This decline could mean that the inflated home prices seen throughout the year are finally correcting.”
The National Association of Realtors also just reported that foreign investment in U.S. existing homes has cooled to the lowest rate in a decade, dropping 27% to just over $54 billion from April 2020 to March 2021.
In some ways, this is to be expected: With leisure and business travel curtailed and international students unable to attend U.S. schools onsite for much of the 2020/21 academic year, there would have to be some repercussions in residential real estate. Despite these challenges, the U.S. housing market is still one of the safest investments for many buyers from abroad.
Two more points bear watching in the next few months. First is the impact on the housing market when eviction moratoriums expire (headlined in this Newsweek article, “As Eviction Moratorium Expires, Americans Owe $20 Billion in Unpaid Rent,” the article cites reports indicating that more than 15 million people — half of them children — live in homes in which they’re behind on rent payments). Another point is the rebounding of commercial real estate, which has come back both quicker and stronger than expected.
Governmental actions
As I said in last week’s post, I think the Biden administration has done a good job managing pandemic impacts, the vaccine rollout and the economic recovery thus far. The challenge now is that there isn’t a whole lot more that the government can do without either stirring protests regarding individual rights or potentially doing more harm than good for jobs and the economy.
And that’s why I feel a bit queasy these days — although that could turn around quickly. What would help? Let’s start with a little more inoculation in our people and a bit more reason in the markets to quell some of the volatility.
Together, these would ease many of my concerns — and after a tumultuous 18 months, smoother sailing would be welcome for a while.
