Equity markets slumped this week amid concern about China’s economy and another move higher in bond yields. The S&P 500 fell 2.1%, with all sectors in the red. Banks lagged, down 5%, while consumer stocks were only slightly better.
Earnings results on the latter were mixed, with Walmart raising its outlook, although hinting at some pressure on discretionary spending, while Target chopped its guidance.
Meantime, the TSX was down 2.9% on the week, with materials, banks and telecom all struggling.
Housing Prices
Despite markets’ concerns about interest rate volatility, housing prices have held up remarkably well in both Canada and the United States. What’s causing this? In our view, it’s two primary factors. First, there’s still the problem of low inventory. As a homeowner, there’s little incentive to sell right now because the only alternatives are a higher mortgage rate or paying high rental costs. Second, there is a general belief that we’re at the end of the interest rate cycle. This is prompting some potential home buyers to think that prices may not drop any more and that it’s worth getting into the market before prices start to rise again. While both the U.S. and Canadian housing markets look to be stabilizing, we still think there could be another leg lower in the near term, albeit not a steep drop. That’s because there’s no guarantee that the U.S. Federal Reserve (Fed) and Bank of Canada (BoC) won’t take further action; just because we think we’re near the end of the cycle doesn’t mean we’re necessarily done with rate hikes. Right now, only a portion of homeowners have had to deal with the full effects of higher rates, but more will feel them over the next couple of years as renewals come up. Some people will simply not be able to afford a costlier mortgage, and that is likely to result in more inventory coming on the market at depressed prices as homeowners downsize to smaller properties.
Bottom Line: There is likely still room for housing prices to decrease marginally in the near term, but overall, the market appears to be stabilizing, and more homes could come on the market down the line.
Earnings
Last week, Walmart beat earnings expectations and raised their full-year guidance. This begs the question—is this a positive indicator for the overall economy, or is it a sign that consumers are moving down the retail ladder? Walmart and similar retailers like Target have been dealing with an excess of inventory, which they built up due to high demand for Consumer Staples during COVID. When the pandemic ended, they were stuck with this supply, which they then had to offload at lower prices. That issue is now largely in the past and inventory is back to normal levels, which is a positive sign going forward. There is also the consumer side of the equation—spending is still good but is nonetheless gradually slowing down, and as we see more job losses, it’s likely that spending patterns will change, with more people trading down. Savings from COVID are drying up, meaning that all but the most high-end consumers are likely to shift from Discretionary toward Staples. Lower-end retailers like Walmart are likely to benefit from this shift, as they did during COVID. As a result, we think that the Consumer Staples sector has room for upside from here.
Bottom Line: What’s good for lower-end retailers is potentially troubling for the economy, as companies like Walmart are likely to benefit from a trade down in consumer spending.
Gold
To put to simply—we still like gold, however maybe a bit less than a few months ago. Uncertainty on interest rates, inflation, geopolitical risk, the economy, and seasonality for buying in markets like India are all big plusses for gold at this time. There is also the metal’s defensive value; there’s nothing wrong with utilizing a ‘barbell’ strategy that complements a Tech exposure with gold to mute volatility. Across the board, the asset mix in our portfolios remains fairly close to neutral, but we do hold positions in gold in many portfolios for exactly this kind of protection. Our expectation is that gold will have good value over the next few months as volatility rises. However, the reason we do like it a bit less is that rates could still go higher from here, which is part of the explanation for why it has lagged more recently.
Bottom Line: Gold is still likely to be an excellent counterweight in a portfolio, helping to justify more volatile Tech positions.
The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
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Are Housing Prices Finally Coming Down?
August 21 to 25, 2023
Are Housing Prices Finally Coming Down?
August 21 to 25, 2023
Sadiq S. Adatia, CFA, FSA, FCIA
Market Recap
Housing Prices
Despite markets’ concerns about interest rate volatility, housing prices have held up remarkably well in both Canada and the United States. What’s causing this? In our view, it’s two primary factors. First, there’s still the problem of low inventory. As a homeowner, there’s little incentive to sell right now because the only alternatives are a higher mortgage rate or paying high rental costs. Second, there is a general belief that we’re at the end of the interest rate cycle. This is prompting some potential home buyers to think that prices may not drop any more and that it’s worth getting into the market before prices start to rise again. While both the U.S. and Canadian housing markets look to be stabilizing, we still think there could be another leg lower in the near term, albeit not a steep drop. That’s because there’s no guarantee that the U.S. Federal Reserve (Fed) and Bank of Canada (BoC) won’t take further action; just because we think we’re near the end of the cycle doesn’t mean we’re necessarily done with rate hikes. Right now, only a portion of homeowners have had to deal with the full effects of higher rates, but more will feel them over the next couple of years as renewals come up. Some people will simply not be able to afford a costlier mortgage, and that is likely to result in more inventory coming on the market at depressed prices as homeowners downsize to smaller properties.
Bottom Line: There is likely still room for housing prices to decrease marginally in the near term, but overall, the market appears to be stabilizing, and more homes could come on the market down the line.
Earnings
Last week, Walmart beat earnings expectations and raised their full-year guidance. This begs the question—is this a positive indicator for the overall economy, or is it a sign that consumers are moving down the retail ladder? Walmart and similar retailers like Target have been dealing with an excess of inventory, which they built up due to high demand for Consumer Staples during COVID. When the pandemic ended, they were stuck with this supply, which they then had to offload at lower prices. That issue is now largely in the past and inventory is back to normal levels, which is a positive sign going forward. There is also the consumer side of the equation—spending is still good but is nonetheless gradually slowing down, and as we see more job losses, it’s likely that spending patterns will change, with more people trading down. Savings from COVID are drying up, meaning that all but the most high-end consumers are likely to shift from Discretionary toward Staples. Lower-end retailers like Walmart are likely to benefit from this shift, as they did during COVID. As a result, we think that the Consumer Staples sector has room for upside from here.
Bottom Line: What’s good for lower-end retailers is potentially troubling for the economy, as companies like Walmart are likely to benefit from a trade down in consumer spending.
Gold
Bottom Line: Gold is still likely to be an excellent counterweight in a portfolio, helping to justify more volatile Tech positions.
Positioning
For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Prices Cool in a Scorching Summer: What Happens Next?
Disclosures:
The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
Insights
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Why American consumers are holding on—and Canadians aren’t