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STAYING DEFENSIVE WITH DIVIDENDS AND REAL ESTATE (1220 EDT/1620 GMT)
U.S. housing data has recently been a bit wobbly, says Saira Malik, chief investment officer at Nuveen, and has significant implications for the housing sector and the broader economy.
Among other factors, Malik cites deteriorating homebuilder and consumer sentiment, higher mortgage rates, historically low affordability, declines in housing starts and building permits, and record-low inventories of existing homes for sale.
That said, Nuveen doesn't see evidence of a housing bubble that's about to burst. Instead, Malik says there's neither a bubble nor bottom for the U.S. housing market.
"Consumer pessimism aside, demand for homes is still healthy. Further, mortgage rates have moderated since the spring and lending standards remain rigorous."
Additionally, though homebuilder confidence is down sharply this year, Malik says it is, nevertheless, above its long-term average. That said, she admits plenty of pain remains, especially for renters.
As Malik sees it, real estate investors should be well positioned, especially if their sector and regional exposures are aligned with demographic and supply-demand trends.
She believes builders are still playing catch-up from the global financial crisis, with housing starts still above trend. To her, this will reinforce longer-term price stability in the sector, and supports Nuveen's constructive outlook.
At the same time, U.S. consumers are feeling the squeeze of higher home prices and rental costs, causing them to curtail spending on other goods and services. This should eventually take a toll on corporate earnings, and along with further economic uncertainty, she believes market volatility will persist.
Malik's takeaway is to remain defensive, which means focusing on dividend growth stocks since they're generally higher quality and derive more of their total return from dividends than from stock price gains.
According to Malik, another way to stay defensive is to shift some equity risk to strategies that still offer upside return, but with much less downside risk:
"Private real estate falls into this category, having delivered consistent returns over time (including in 2022) while typically avoiding extreme return scenarios (up or down) compared to other asset classes."
(Terence Gabriel)
I'VE GOT GOOD NEWS AND BAD NEWS: HOUSING STARTS, INDUSTRIAL OUTPUT (1105 EDT/1505 GMT)
Indicators released on Tuesday mirrored the quandary investors face - a cooling housing market portends a broader economic slowdown while factory data suggests the economy at the moment can withstand the cold water dumped on it by the Fed's inflation curbing efforts.
Groundbreaking on new U.S. homes dropped 9.6% in July to 1.446 million units at a seasonally adjusted annualized rate (SAAR), according to the Commerce Department.
It was the lowest reading since February 2021 and came in well below expectations; economists polled by Reuters expected a much shallower 1.2% decline.
Single home projects, which account for the lion's share of the total, plunged 10.1% to the lowest level in more than two years.
The weakening housing sector is the result of an elaborate Rube Goldberg-like chain of events, and it began with the COVID-prompted stampede for suburbia which drove inventories to record lows, which launched home prices into orbit.
The pandemic also threw a monkey wrench into the supply chain, which sent building material prices - and prices for everything else - through the roof. This, in turn, has caused the Fed to tighten financial conditions, which has put upward pressure on mortgage rates.
TLDR; fewer potential home buyers can afford the monthly payment.
"As housing activity continues to moderate under the weight of rising interest rates and a persistent shortfall in supply, we look for starts to lose further momentum over the coming months," says Mahir Rasheed, U.S. economist at Oxford Economics (OE). "
However, with July's weakness in starts and August's deterioration in homebuilder sentiment, risks to the outlook are decidedly tilted to the downside."
A reminder - residential construction detracted 0.7 percentage points from topline GDP in the April to June period, the second straight quarterly contraction, meeting a widely accepted definition of recession.
And there's likely more to come.
"Housing has become a headwind for the broader economy and will likely subtract from GDP growth over the next year," says Bill Adams, chief economist at Comerica.
Building permits - one of the more forward-looking housing indicators - slipped 1.3% to 1.674 units SAAR, a bit shallower than the 2.7% consensus decline.
The report echoed the dour homebuilder sentiment data released by NAHB on Monday, which showed the mood among builders notching its first pessimistic print since May 2020.
Later this week, mortgage rates/demand and existing home sales data are expected to round out the picture.
The graphic below provides a one-stop-shopping overview of the housing sector in COVID's tumultuous wake (click to enlarge):
On a sunnier note, a report from the Federal Reserve showed industrial output accelerated last month, growing by 0.6%, double the expected rate.
As outpointed by Ian Shepherdson, chief economist at Pantheon Macroeconomics, the increase was driven by an impressive 6.7% jump in car production, a sector that's been stuck in the mud for months due to a worldwide chip shortage.
And that's a positive sign for the broader economy.
"Autos are the last remaining large sector of the economy with pent-up demand, and stronger sales will add meaningful support to overall consumption in Q3 and Q4," Shepherdson writes.
"At the same time, rising production will cap and then reduce dealers’ margins, which have more than tripled since early 2021, putting downward pressure on core inflation; new and used vehicles account for more than 10% of the core CPI."
But don't expect the party to last.
"Looking ahead, industrial production will have a relatively tough time growing in an economic environment of high inflation, rising interest rates, persistent supply chain problems, and weakening domestic demand," says Oren Klachkin, lead U.S. economist at OE.
Capacity utilization, a measure of economic slack, rose 40 basis points to 80.3%, the tightest reading since August 2018. That should provide comfort for market participants who fear that Fed rate hikes amid an economic cooldown could usher us into recession.
Wall Street was mostly cloudy by late morning trading. The S&P and the Nasdaq were red, but the blue chip Dow clung to a modest gain.
Value stocks had the edge over growth and economically sensitive transports were the session's clear winners.
WALL STREET MIXED AS HOUSING DATA DOUSES RETAIL SALES (1000 EDT/1400 GMT)
Wall Street was mixed on Tuesday as optimism over Walmart's results lifted sentiment, but a sharp decline in U.S. homebuiding last month as higher mortgage rates and prices for construction materials offset the enthusiasm over retail sales.
Info tech is the biggest declining sector, while energy and staples are among gainers. The Dow transports are rising, but semiconductors and small caps are lower. Value shares are up, while growth is down.
Investors welcomed a less dire outlook from Walmart Inc after the retail giant forecast a smaller drop in annual profit than expected. Walmart's shares are up 5.42%, helping to send other retail stocks higher, such as Target, up 2.63%.
Home Depot Inc surpassed estimates for quarterly sales after demand from builders and higher prices helped the biggest U.S. home-improvement chain cushion the hit from dwindling store visits. Home Depot's shares are rising 2.57%.
The housing market has been hardest hit by the Federal Reserve's aggressive hiking of interest rates, which aims to cool the economy to tame inflation.
But the rising rates led U.S. homebuilding to fall last month to the lowest level in nearly 1-1/2 years, while permits for future home construction slipped to a 10-month low.
Investor sentiment has gone from being very poor in June and July to recent talk of a Goldilocks scenario and of the proverbial FOMO, or "fear of missing out," says Mark Haefele, chief investment officer at UBS Global Wealth Management.
"We would caution investors against chasing this rally," Haefele says in a note. "We expect renewed market volatility ahead, and we continue to recommend positioning portfolios for resilience under various scenarios."
Here is a snapshot of early market prices:
(Herbert Lash)
DOW INDUSTRIALS: CLAW BACK SCRATCHES 200-DAY MOVING AVERAGE(0900 EDT/1300 GMT)
In the wake of the market's June lows, the Dow Jones Industrial Average is the first of the major indexes to reclaim its 200-day moving average (DMA):
The Dow finished Monday at 33,912.44, which put it above its 200-DMA, which ended at 33,897.14, by 15.3 points, or about 0.05%. It was the Dow's first close above this closely watched long-term moving average since April 20.
The S&P 500 is still around 0.7% below its 200-DMA, while the Nasdaq is around 2.8% shy of its 200-DMA.
The small-cap Russell 2000 actually closed above its 200-DMA last Friday for the first time since Jan. 4, the day of the Dow's record close. The RUT notched a second-straight finish above the moving average on Monday, though by just 0.5%.
Meanwhile, the DJI also finished Monday essentially right on the resistance line from its record intraday high.
Of note, since ending below its 200-DMA on Jan. 20, and prior to Monday, the Dow saw three periods where it was able to reclaim its 200-DMA on a closing basis.
In late January/early February it managed to end above the 200-DMA for nine straight trading days (tds), and by at most around 2%. In late March, it ended above the 200-DMA for two straight tds by at most about 1%, and in mid April it closed above its 200-DMA for just one trading day, by 0.4% (average 4 tds, by around 1.1%).
Thus, with the Dow up around 14% from its June closing low, and now battling these resistance hurdles, traders will be watching closely to see how the blue-chip average responds.
(Terence Gabriel)
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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)