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On Wednesday, the Federal Reserve lowered the interest rate for the first time since 2020. Jeanna Smialek, a reporter covering the Federal Reserve and the U.S. economy for The New York Times, explains what the half-percentage-point cut could mean for the economy, politics and you.
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Jeanna Smialek, Karen Hanley, Claire Hogan and James Surdam
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Rising interest rates. Natural disasters. There are a host of reasons not to buy a home in the current real estate market — particularly in certain areas. But the ultra-rich are unfazed.
As most of the market recovers from its pandemic hangover, megamansions in some cities have been immune to the slowdown. Across the country, billionaires are still spending tens of millions of dollars on homes, despite traditional logic telling them to park their money elsewhere.
A new report from Realtor.com says that six cities have emerged as the favorites of the elite so far this year, and two of them are in California. Tops for the fat-cat crew are Malibu, San Francisco, Aspen, New York City, Miami and Palm Beach.
All six have seen sales north of $50 million so far in 2024, and a handful have seen sales much, much higher.
In May, a private island compound in Palm Beach fetched $152 million, setting the all-time price record in the Sunshine State. California saw a record of its own a month later when Oakley founder James Jannard sold his Malibu spread for $210 million.
For every excuse not to buy, billionaires find a workaround, the report said.
For example, climate change and its ripple effects — floods, fires and storms — threaten homes in coastal communities across California and Florida. But Federal Emergency Management Agency regulations and insurance providers have raised the standards for homebuilders and developers, requiring increased wind and flood protection. So well-heeled buyers in Florida, for instance, see many new homes, especially expensive ones, as hurricane-proof.
Storm-prepped homes may be too expensive for some, but not for those with a budget of $50 million or more.
The same logic goes for other environmental disasters, the report said. Wealthy beach-house hunters can minimize the effects of coastal erosion by buying a home with a concrete foundation and brand-new sea wall, which protects against crashing waves and shrinking beaches much better than do the older, less pricey homes built on wood stilts in the 1950s and ’60s.
For mansions in fire-prone areas, billionaires outfit estates with fire suppression systems and even hire private teams of firefighters to protect their homes from the flames.
The other factor barring some potential buyers from the housing market? Soaring interest rates.
Unlike during the pandemic, when rates plummeted to 2% or lower, rates in the modern market hover around 7%.
A mortgage payment with a 7% rate can cost thousands of dollars more per month — or even tens of thousands more for multimillion-dollar properties. But billionaires aren’t at the mercy of interest rates for a few reasons, the report said.
Some affluent buyers can pay all-cash for a luxury property, avoiding interest altogether.
Others are able to broker special deals with banks due to their longstanding relationships and massive holdings. In other words, the more zeroes you have in your account, the better rate you’ll score from a bank.
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Jack Flemming
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new video loaded: Fed’s Powell Signals an Upcoming Rate Cut in Jackson Hole Remarks
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The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks. We will do everything we can to support a strong labor market as we make further progress toward price stability. Today, the labor market has cooled considerably from its formerly overheated state. The unemployment rate began to rise over a year ago and is now at 4.3 percent — still low by historical standards, but almost a full percentage point above its level in early 2023. The upside risks to inflation have diminished. And the downside risks to employment have increased. After a pause earlier this year, progress toward our 2 percent objective has resumed. My confidence has grown that inflation is on a sustainable path back to 2 percent. So let me wrap up by emphasizing that the pandemic economy has proved to be unlike any other and that there remains much to be learned from this extraordinary period.
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It’s been a nerve-wracking August for investors.
After the Federal Reserve closed July by maintaining the benchmark Fed funds rate at 5.25% to 5.5%, where it’s been for over a year, investors have been clamoring for a do-over.
The S&P 500 plunged 6% over the first three trading days of August as a raft of downbeat economic data convinced investors that the economy was weakening faster than expected and the Fed had erred in not lowering rates.
Stocks plunged on Monday as a surprise interest rate hike in Japan led to the unwind of a global “carry trade” in which investors had borrowed low-interest yen to invest in risky assets in the U.S. like the “Magnificent Seven” stocks.
As a result of the sharp three-day sell-off, economists now expect the Fed to cut rates by 50 basis points in its September meeting and at least another 50 basis points before the year’s over.
The economy is likely to remain uncertain, but one thing is clear. Lower interest rates will help to revive a struggling housing market, breathing new life into stocks that depend on real estate transactions.
That industry has been hit hard by the slowdown in the housing market, but a turnaround could be near. One stock that could soar in the recovery is Compass (NYSE: COMP), the nation’s No. 1 real estate brokerage by sales volume.
Compass went public in the spring of 2021 when the real estate market was booming, and mortgage rates were around 3%. However, that boom did not last long, and by the time 2022 rolled around, revenue was sliding, and the stock was flailing.
With the housing market remaining on ice, Compass has focused on realigning its cost structure, investing in technology, and growing its base of agents, which has helped drive revenue higher even in a challenging market.
Revenue increased 14% to $1.7 billion in the second quarter, and Compass’s number of principal agents rose 24% to nearly 17,000 as it’s luring new agents with an attractive technology platform and a steady marketing push. After two years of declines in total transactions, the business has returned to growth, a sign that the industry is starting to turn around.
Compass is also targeting positive free cash flow this year and is making progress in profitability as adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped from $30.1 million to $77.4 million in the seasonally strong second quarter.
The real estate brokerage industry is in flux after a lawsuit against the National Association of Realtors forced brokerages to amend their business model with more disclosures and information that makes it clear that traditional 3% commissions are negotiable. As a part of the settlement agreement, Compass agreed to pay $57.5 million.
Compass has also assuaged concerns that the agreement would dramatically change the industry, noting in May that in the initial weeks after the settlement, 99% of new listings included offers to pay the buyers agent, and 96% included commission offers of 2% or more. Compass believes the settlement will have little impact on professional full-time agents.
The housing market will probably never return to the heady early days of the pandemic when Americans in cities were plucking up second homes and suburban plots with yards, and mortgage rates fell to less than 3%.
However, there is substantial pent-up demand from homebuyers looking for falling rates to effectively lower prices by bringing down monthly payments and from potential home sellers who may not want to give up their low mortgage rates when current rates are so high.
In June, existing home sales fell to a seasonally adjusted annual rate of 3.89 million, down from a peak of 6.6 million in 2021, a decline of 41%. Reversing that loss would mean a surge in existing home sales of 70%.
Compass doesn’t need that to happen, but even getting back to pre-pandemic levels would mean a 50% increase from current existing home sales, and that should make a significant difference on the bottom line. CEO Robert Reffkin told investors this spring, “We believe when rates come down it will create a massive surge in transactions,” and he predicted lower rates would mean hundreds of millions in adjusted EBITDA and free cash flow, assuming normalized annual home sales of 5.4 million-5.6 million homes.
The business is already moving in the right direction, with revenue up double digits, and growth is likely to accelerate substantially as mortgage rates come down and the housing market picks up again.
Compass stock has already more than doubled from its low last November, trending with hopes of a recovery in the housing market and stabilization in its own business. Down 79%, Compass doesn’t have to recoup those losses to be a winner. The stock could double by only retracing a quarter of those losses.
If the Fed cooperates and the housing market shows signs of life, a double for the real estate brokerage stock from here certainly seems within reach.
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Down 79%, This Growth Stock Could Double in the Housing Rebound was originally published by The Motley Fool
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Since the start of the bull market in October 2022, stocks’ move higher has largely been about artificial intelligence and the outperformance of a few large equities, driving investor concern that gains aren’t widespread enough for the rally to continue.
That could be changing.
Thursday’s better-than-expected inflation reading has sent the stock market into a tizzy in recent trading days. As investors have rapidly priced in higher chances of an interest rate cut from the Federal Reserve in September, the most loved areas of the market of the past year have underperformed as investors rotate into sectors outside of tech.
The Roundhill Magnificent Seven ETF, which tracks the group of large tech stocks that led the 2023 stock market rally, is down more than 1.5% in the past five days. Meanwhile, Real Estate (XLRE) and Financials (XLF), both interest rate-sensitive sectors, have been the market’s biggest winners over the same time period. The small-cap Russell 2000 (RUT) index is up more than 7% and finally breached its 2022 high for the first time during the current bull market.
In another sign that a wide swath of stocks are rallying, the equal-weight S&P 500 (^SPXEW), which ranks all stocks in the index equally and isn’t overly influenced by the size of the stocks moving higher or lower, has outperformed the traditional market cap-weighted S&P 500.
Ritholtz Wealth Management chief market strategist Callie Cox told Yahoo Finance the market action as of late has been “refreshing” and could be the sign of a maturing bull market, where a wide range of stocks are contributing to the rally, providing more support for stock indexes at record levels.
“If this trade continues, if the prospect for a rate cut is still in play for this fall, then we could finally see the bull wake up, and that’s good news for all investors,” Cox said.
It’s not the first time strategists have been optimistic about market rotations like the one currently happening. Other spurts of widespread rallies were celebrated in December 2023 and during the first quarter of this year.
The question is whether a big broadening of stock market gains is finally underway this time, or if this is yet another head fake as the market becomes overly optimistic about Fed rate cuts.
“The conviction level that we have is higher right now than back in December [during the Fed pivot-driven market rally],” Bank of America Securities senior equity strategist Ohsung Kwon told Yahoo Finance.
Kwon notes that the narrative driving the rally — hopes of a soft landing and gradual interest rate cuts from the Fed — is largely unchanged from the prior broadening spurts. But this time, he said, “the earnings backdrop is really supporting this rotation as well.”
Bank of America’s earnings analysis shows the 493 stocks not including the Big Tech “Magnificent Seven” are expected to grow earnings year over year for the first time since 2022 during the current reporting period. As seen in the chart below from JPMorgan Asset Management’s midyear outlook in June, the earnings growth of those stocks is expected to pick up in the coming quarters, while Big Tech is expected to see its earnings growth slow.
Given that earnings are typically the key driver of stock prices, this would support the theory of a broadening rally. But the key caveat is that these are just expectations. And given the market’s struggle thus far this year to produce a wide array of winners, some strategists want to see actual earnings growth to confirm the narrative that’s currently seen in the estimates.
“I want to see earnings growth come from more sectors than just tech,” Cox said. “I think that that’s the big theme of this particular season. You know, seeing how many sectors can actually pitch in and move the S&P 500’s profit expectations higher.”
The same could be said for the other narrative backing the recent rotation. Markets are now pricing in a more than 90% chance the Fed cuts interest rates in September, per the CME FedWatch tool. But again, Cox is wary of declaring the broadening will certainly continue.
“Until we’re officially in that rate cut cycle, it’s hard to say that this broadening trade is here to stay,” Cox said. “I hope it is. I’m optimistic it is, but you’re still going to have a market that’s hanging on every piece of economic data that comes across the tape.”
Charles Schwab senior investment strategist Kevin Gordon is also cautious about declaring the big broadening has arrived. Gordon noted “more clarity” on the Fed’s cutting cycle and why it would start cutting remains paramount, particularly for the most interest rate-sensitive areas of the market like small caps.
Gordon reasoned the recent market action has been a “great step in the right direction.” But a broad rally won’t come overnight, Gordon said. He added, “The nature has been for everybody to say that it’s this great rotation, but great rotations tend to take a little bit longer than a couple of days.”
And even if that rotation slowly occurs, recent index performance shows that will mean a different, slower path higher for the S&P 500 too. The S&P 500 closed down last Thursday despite the release of a promising June inflation report as investors moved out of the large tech stocks, which hold bigger weightings in the index than smaller stocks.
“We could see a little bit of this churn where some stocks are passing the baton to other stocks,” Cox said. “Tech stocks are passing the baton to other stocks. Sure, we may not see prices move up as quickly as they have. But this is the kind of movement that strengthens the foundation of a bull. It means that this rally can be stronger and live longer eventually.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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Southern California home prices hit a record for the third-straight month in May, but there could be some help on the horizon.
Although home prices increased, more listings are finally coming onto the market, giving cash-strapped home buyers more options.
What is happening?
In May, average home prices across the six-county region rose nearly 1% from April to $875,409, according to data from Zillow. It was the third consecutive month that prices hit a record and values are now 9% above May 2023 levels.
Why are home prices rising?
Simply put, there are too few homes for sale in Southern California for all the people who want to buy here.
Economists and real estate agents say the long-running problem was made worse after mortgage rates surged in 2022.
At first, home prices fell as buyers pulled away and the inventory swelled. But prices started rising again last year as homeowners increasingly chose not to sell, unwilling to give up rock-bottom mortgage rates on loans taken out before and during the pandemic.
The pullback among sellers became so prevalent that it even got its own name: the seller strike.
What is happening with inventory?
Things are improving. As interest rates stay higher for longer, more homeowners are deciding to get on with their lives and list their home for sale, deciding additional space, a new job or other factors are more important than keeping a 3% mortgage.
In April, most Southern California counties saw the total number of homes for sale increase for the first time since the first half of 2023.
Last month, inventory jumped again. In Los Angeles County, total listings were 13% higher in May compared with a year earlier; Orange County rose by 6%; in Riverside County, 14%; San Bernardino County, 15%; Ventura County, 18%; and San Diego County, 30%.
“That’s a very positive development,” said Stuart Gabriel, director of the UCLA Ziman Center for Real Estate. “We have just been incredibly short on supply.”
If I a want to buy a home, what does the inventory increase mean for me?
Well, at the most basic level, there will be more options from which to choose.
Inventory is still very low historically so don’t expect your home search to be a breeze, but it could mean fewer bidding wars and an easier time getting into a house.
Gabriel said the inventory increase probably isn’t enough to send home prices down, but, if the trend holds, home prices should rise less than they are today.
Mike Simonsen, founder of real estate data firm Altos Research, said sellers are already more likely to trim their list prices than last year.
He doubts that overall values will turn negative this year and, like Gabriel, expects only slowing appreciation in the L.A. area. But that could change in 2025.
“If rates are still in the 7s, prices flat or down is a real scenario,” Simonsen said.
On the other hand if rates noticeably drop, Simonsen said, demand is likely to pick up more than inventory, setting the stage for home prices to rise even faster than they are now.
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Andrew Khouri
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Investors are on edge this week as Federal Reserve officials prepare to signal how many interest rate cuts are still likely in 2024.
Most market watchers believe policymakers will dial their expectations back. The question is by how much.
The new projection on Wednesday will come in the form of a so-called “dot plot,” a chart updated quarterly that shows the prediction of each Fed official about the direction of the federal funds rate.
In March, the dot plot revealed a consensus among Fed officials for three cuts. Now that projection is in question following a string of sticky inflation readings, cautious commentary from Fed officials and a US labor market that added more jobs than expected in May.
Most investors now expect little more than just one cut for 2024.
“I think the policy path will change a bit,” said former Kansas City Fed president Esther George, who predicts the median among 19 policymakers could drop to one cut even as a healthy number of officials still argue for two.
“My expectation is the dots will show and confirm what I think the market has picked up, and that is fewer rate cuts with the inflation forecast holding.”
Fed Chair Jay Powell and his colleagues on the Federal Open Market Committee have been emphasizing they want to be sure inflation is moving “sustainably” down to their 2% target before starting cuts, and that in the interim they expect to hold rates higher for longer.
That stance isn’t expected to change this week. Officials are widely expected to hold the Fed’s benchmark rate steady on Wednesday, leaving it at a 23-year high.
Policymakers are expected to stay cautious because the latest readings on inflation and the economy offer a mixed picture.
The labor market added 272,000 nonfarm payroll jobs in May, significantly more additions than the 180,000 expected by economists, but the unemployment rate rose to 4% from 3.9%.
Prices aren’t accelerating as much as they were during the first quarter, but recent readings also don’t show enough progress for the Fed to start cutting.
The year-over-year increase in the Fed’s preferred inflation gauge — the “core” Personal Consumption Expenditures index — was 2.8% in April, unchanged from March.
Another complication is that wages are showing resilience, as well. Wage growth was stronger than expected in May, clocking in at 4.1%.
Fed officials will get a fresh reading from another inflation gauge, the Consumer Price Index (CPI), just hours before concluding their policy meeting this Wednesday. It is expected to show continued moderation during May after an encouraging April.
The year-over-year change in so-called “core” CPI — which excludes volatile food and energy prices the Fed can’t control — is expected to edge down a tenth of a percent to 3.5%, compared with 3.6% in April and 3.8% in March.
A 3.5% print on CPI may not be enough to inspire confidence at the Fed, according to George.
“I think it’s just going to take them quite a bit longer to figure out what the trend is,” George said.
Powell has made clear that he thinks the Fed will need more than a quarter’s worth of data to make a judgment on whether inflation is steadily falling toward the central bank’s goal of 2%.
The September meeting is viewed by many as an optimistic case for cutting rates since the three inflation reports due out between now and then would all need to show improvement for the central bank to pull the trigger.
In the meantime, investors expectations for the number of rate cuts this year have swung wildly.
Odds for a first cut in September fell to roughly 52% following the hotter-than-expected jobs report released Friday, and wagers for a second rate cut dwindled to little more than a 38% chance in December.
Luke Tilley, chief economist for Wilmington Trust, is more optimistic. He expects the central bank will have enough data to change its tune by its policy meeting on July 31.
The inflation data in the first month of the second quarter has helped calm fears about hotter readings in the first quarter, he said, and the CPI data out Wednesday will offer further reassurance.
“By the time July 31st comes around, they’ll have three more months of inflation data,” Tilley said. “I think they’ll be back on the front of their feet and off their heels and ready to cut. But it really comes down to how that data comes out.”
Wednesday will also bring other new Fed projections for investors to digest this week, as policymakers will also offer fresh forecasts for inflation, the economy and unemployment.
And there will be the usual high level of scrutiny on whatever Powell has to say at his regular press conference following the meeting.
Wilmer Stith, bond portfolio manager for Wilmington Trust, is looking to see whether Powell takes a more hawkish tone.
“Is he going to be like a [Minneapolis Fed President Neel] Kashkari and other members who say we need to be higher for longer?” says Stith.
“It’s hard to say because if we continue to get the economic growth and the labor market strength that we’ve seen, I don’t even know why they’d want to do one cut.”
Stith said he thinks officials will pencil in two rate cuts. If the Fed only marks down just one, that could add some volatility to markets, he added, even though that is currently what investors expect.
There is a risk the Fed could become too patient in its quest to be sure inflation is dropping, George said. Holding rates this high for too long could also sow the seeds of a recession.
“That’s the risk they’re running here, is to say ‘time is on our side,’” she said.
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new video loaded: ‘Lack of Further Progress’ on Inflation Keeps Interest Rates High
transcript
transcript
Today, the F.O.M.C. decided to leave our policy interest rate unchanged and to continue to reduce our securities holdings, though, at a slower pace. Our restrictive stance of monetary policy has been putting downward pressure on economic activity and inflation, and the risks to achieving our employment and inflation goals have moved toward better balance over the past year. However, in recent months, inflation has shown a lack of further progress toward our 2 percent objective, and we remain highly attentive to inflation risks. We’ve stated that we do not expect that it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent. So far this year, the data have not given us that greater confidence. In particular, and as I noted earlier, readings on inflation have come in above expectations. It is likely that gaining such greater confidence will take longer than previously expected.
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The New York Times
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The sticker prices on automobiles are higher than ever, but the monthly payments for leases and financing — with all the interest and fees rolled in — are truly where the staggeringly high figures can be found.
Blaisey Arnold knows this firsthand, three years into owning her Chevy Tahoe. The mom of three says in her viral TikTok video that she financed the vehicle at $84,000 and paid $1,400 every month for the past three years, which comes to around $50,000.
Yet the North Carolina mom says she still owes at least $74,000 on the car loan.
“Honestly, that blows my mind,” she says to the camera. Her audience clearly feels the same way: “You need to learn about interest rate,” one commenter said.
Leaving aside the specifics of her situation — which seems to be particularly extreme — auto loans can be crippling to a household’s budget, even if you’re not splurging on a top-of-the-line SUV.
Arnold doesn’t disclose the interest or annual percentage rate (APR) that’s attached to her Tahoe loan.
APR is a measure of the total yearly cost of a loan, including the interest rate and all additional fees. It’s determined according to a host of factors, such as the key interest rates set by the Federal Reserve, retailers’ own borrowing terms and, importantly, your credit score (a higher credit score will yield a lower APR, and vice versa).
In another video, Arnold says that her husband pays 14% APR on his 2020 GMC AT4 Sierra 1500. She adds that his monthly payment —$1,600 — is greater than her own.
According to Experian, the average borrowing rate for a new vehicle was 7.03% in Q3 2023, up from 5.26%; for a used vehicle, the average was 11.35%, up from 9.38% last year.
Arnold says she and her husband bought the AT4 in 2022 and yet they still owe $72,000 to $74,000 of the $78,000 purchase price.
Arnold’s family’s car situation seems especially dire. She doesn’t provide enough information to explain how only about 20% of her own monthly payment is apparently being applied to the principal.
What is true for every car buyer, however, is that, unlike your home, an automobile loses value the second you drive it off the lot. Car insurer Progressive estimates that cars lose 20% of their value within the first year, and continue to lose 15% every year until about the fourth or fifth year.
For this reason, auto loans often end up “underwater” — a situation in which the outstanding principal is greater than the value of the car or truck.
Arnold has decided to get rid of her Tahoe, though she doesn’t say whether her husband plans to give away his truck.
“Do not pay so much for something that is so irrelevant,” she warns her followers.
Arnold decided to ditch the Tahoe and buy an Audi in cash so she won’t have any more car payments. The reason she can do this — despite being in major car debt — is because her TikTok career has taken off.
In one of her videos, Arnold shows that she made nearly $4,000 off of just two TikTik videos in March.
Paying cash for a car is the best way to avoid any interest, but it’s not possible for most Americans.
Read more: Generating ‘passive income’ through real estate is the biggest myth in investing — but here’s one surefire way to do it without breaking the bank
Still, if you’re in Arnold’s position and don’t have a thriving TikTok career, there are still ways to get out from under your car payment, according to personal finance celebrity Dave Ramsey.
Ramsey would endorse Arnold’s TikTok side hustle. He recommends getting an extra job so that you can make more payments on your auto loans.
Ramsey would also like that Arnold plans to get rid of her Tahoe. He told a listener in a similar position that he ought to consolidate the auto loans on his multiple cars — and then sell some of them to pay off the remaining balance.
The personal finance radio show host also says that you can go straight to the lender and negotiate with them on your rate. This must be done in-person.
“Not on the phone and for God sakes not by email!” he says. “Go sit down and look ‘em in the eye.”
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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Ken Kahan makes a living building homes.
A specialty? Luxury apartment complexes in Los Angeles neighborhoods such as Palms and Silver Lake filled with mostly market rate units, but with a handful of income-restricted affordable ones as well.
It can be a good business, but lately less so.
“We have pulled back,” said Kahan, the president of California Landmark Group. “The metrics don’t work.”
Across California and the nation, developers moved to start fewer homes in 2023, a decline some experts say could eventually send home prices and rents even higher as supply shortages worsen.
Developers cite several reasons for delaying new projects. There’s high labor and material costs, as well as new local regulations that together make it harder to turn a profit.
Perhaps the biggest factor — and one hitting across the country — is the high cost of borrowing. Rising interest rates not only make it more expensive for Americans to buy a home, but they add additional costs for developers who must shell out more money to build and manage their projects.
As a result, fewer projects make financial sense to build and fewer homes are built.
“More than anything it is debt costs,” said Ryan Patap, an analyst for real estate research firm CoStar.
In all, preliminary data from the US. Census Bureau show building permits for new homes nationwide fell 12% in 2023 from the prior year and 7% in California. Drops were recorded in both single-family homes — most of which tend to be for sale — as well as multifamily homes — which are chiefly rentals.
Dan Dunmoyer, president of the California Building Industry Assn., said one major reason for the decline is that many for-sale home builders foresaw “a massive downturn” and stopped buying lots to develop when mortgage rates soared in 2022.
Then a funny thing happened. Demand for their product didn’t crater as much as expected, in large part because existing homeowners didn’t want to sell and rid themselves of ultra-low mortgage rates.
“Builders kind of woke up and realized ‘Oh, it’s just us [selling homes],‘” Dunmoyer said. “But we don’t turn on a dime.”
As for-sale builders restart their engines to take advantage of a shortage of listings, there are signs of improvement. During the first two months of this year, builders in California pulled 35% more permits for single-family homes than during the same period a year earlier, according to census data.
Permits for multifamily continued to decline — dropping 33%.
The diverging paths are probably due to several factors, said Rick Palacios Jr., director of research for John Burns Research and Consulting.
On a whole, single-family home builders have access to a wider source of debt that isn’t as vulnerable to rising interest rates. In the single-family market, the supply shortage has also worsened and home prices are climbing.
Meanwhile, rents in many places — including Los Angeles — have dropped slightly as vacancies have risen, in part because apartment construction has been relatively robust in recent years.
“Single-family solid, multifamily weak is a pretty consistent theme across most of the country,” Palacios said. “You’re hard pressed to find a market where developers and investors are gung ho on apartments.”
In the city of Los Angeles, developers must contend with another factor — Measure ULA.
The citywide property transfer tax took effect last year to fund affordable housing and has drawn the ire of the real estate industry.
Though it’s known as the “mansion tax,” except for rare exceptions it applies to all properties sold for more than $5 million, no matter if they are gas stations, strip malls, apartment buildings or actual mansions. Under the measure, a seller is charged 4% of the sales price for properties sold above $5 million and below $10 million.
At $10 million and above, the tax is 5.5%.
Apartment developers and real estate brokers said additional costs from ULA make it even harder to earn a reasonable profit in what can be a risky business.
That’s because when building apartments, developers often sell their finished product, which would probably trigger the ULA tax for any building over 15 units, according to Greg Harris, a real estate broker with Marcus and Millichap. Even developers who hold onto their properties typically need to take out a mortgage on the finished building — and Harris said lenders are willing to give less because they too would need to pay the tax if they foreclose and sell the property.
“ULA is like the last nail in the coffin,” said Robert Green, a Los Angeles developer. “It couldn’t have come at a worse time.”
Many apartment projects got their start under different economic circumstances and have opened in recent years or will soon. That supply should help keep rents down for a while, but not forever, said Richard Green, executive director of the USC Lusk Center for Real Estate.
In two or three years, as fewer apartments are finished “we will see rent start to go up again,” he said.
That would be a hit for Californians struggling to find housing in an expensive state where thousands sleep on the streets.
Economic cycles, of course, ebb and flow and construction may rebound.
The Federal Reserve plans to cut interest rates later this year, which may help more projects make sense financially, as could rising rents.
Land sellers could also drop their asking prices to adjust for rising developer costs, including ULA in Los Angeles.
Normally, real estate analyst Patap said he’d expect apartment construction to rebound as land costs adjust downward. But he noted developers say they are also cautious about building in L.A. because of a broader political shift in the city that’s more supportive of restrictions on landlords and more supportive of protections for tenants.
In the city of Los Angeles, multifamily permits dropped 24% in 2023 compared with 19% in Los Angeles County, census data show. (Data from the Construction Industry Research Board show even larger drops: 49% in the city and 39% in the county.)
Laurie Lustig-Bower, a commercial real estate broker with CBRE, said some L.A. landowners have reduced their prices to sell, but “if they don’t have a gun to their head” they are waiting until developers can pay more.
In recent years, state lawmakers have taken action to make it easier to build housing, in part by eroding local control over land use decisions.
Los Angeles Mayor Karen Bass has also fast-tracked 100% affordable buildings under her Executive Directive 1, while the city recently exempted smaller projects from some storm water capture requirements.
Mott Smith, chairman of the Council of Infill Builders, said more must be done to increase the number of new homes in Los Angeles and cited the storm water decision as the kind of steps government should take.
“The city has no influence over interest rates … [but] what it controls is the process to get a project approved,” Smith said. “There are so many opportunities.”
For now, developers say it’s tough to find opportunities.
Kahan said his company runs the numbers on potential land purchases constantly and at least once a week finds it doesn’t make sense to buy and build.
He expects to purchase some land in Southern California by year’s end, though mostly outside of the city of Los Angeles where Kahan said he’s increasingly looking because of costs from ULA, which unlike current interest rates aren’t expected to change.
So far, Kahan said he’s yet to find a deal that will work — within or outside city borders.
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Foreign investors made a strong return by injecting more than ₹2 lakh crore into Indian equities in 2023-24, driven by optimism surrounding the country’s robust economic fundamentals amidst a challenging global environment.
Looking forward to 2025, Bharat Dhawan, Managing Partner at Mazars in India, said that the outlook is cautiously optimistic and anticipates sustained FPI inflows supported by progressive policy reforms, economic stability and attractive investment avenues. “However, we remain mindful of global geopolitical influences that may introduce intermittent volatility, emphasising the importance of strategic planning and agility in navigating market fluctuations,” he added.
The outlook for FY25 from an FPI perspective, continues to remain strong, Naveen KR, smallcase Manager and Senior Director at Windmill Capital, said.
In the current fiscal 2023-24, Foreign Portfolio Investors (FPIs) have made a net investment of around ₹2.08 lakh crore in the Indian equity markets and ₹1.2 lakh crore in the debt market. Collectively, they pumped ₹3.4 lakh crore into the capital market, as per data available with the depositories.
The dazzling resurgence came following an outflow from equities in the preceding two financial years.
In 2022-23, Indian equities witnessed a net outflow of ₹37,632 crore by FPIs on aggressive rate hikes by the central banks globally.
Before this, they pulled out a massive ₹1.4 lakh crore. However, in 2020-2021, FPIs made a record investment of ₹2.74 lakh crore.
The flows from foreign investors were largely driven by factors such as inflation and interest rate scenarios in developed markets such as the US and UK, currency movement, the trajectory of crude oil prices, geopolitical scenario and the health of the domestic economy among others, Himanshu Srivastava, Associate Director – Manager Research, Morningstar Investment Research India, said.
“Investors increasingly favoured Indian equities, drawn by the market’s demonstrated resilience during uncertain periods. Compared to other similar markets, India’s economy stood out as more robust and stable amidst global economic turbulence, further attracting foreign investment,” he said.
smallcase’s Naveen said that economies like the UK and Japan have fallen into recession, Russia and Ukraine are still at war, the USA’s inflation is running hot and the debate of soft versus hard landing still persists, while China has become the global anti-hero. Therefore, India has stolen the spotlight and is delivering numbers with strong GDP growth even amidst a tough business environment.
After withdrawing funds in the preceding fiscal, FPIs poured a staggering ₹1.2 lakh crore into the debt market too, marking a noteworthy shift in their capital flow. They took out funds to the tune of ₹8,938 crore in FY23.
FPIs’ debt investments have been extremely robust this fiscal due to attractive yields on Indian sovereign debt relative to the US treasury. This has been supported by strong macros in the form of the robust growth outlook for the Indian economy, stable inflation, a stable currency and the stated objective of the Government to improve its fiscal deficit, Nitin Raheja, Executive Director, Julius Baer India, said. Additionally, the upcoming inclusion of Indian bonds in JP Morgan’s index has led to an inflow in advance into the Indian debt markets.
Further, the expected global tapering in policy rates should make bond yields in emerging economies look even more attractive to investors making this trend of inflows into Indian debt more sustainable, he added. In September 2023, JP Morgan Chase & Co. announced that it would add Indian government bonds to its benchmark emerging market index from June, 2024. This landmark inclusion, scheduled for June, 2024, is anticipated to benefit India by attracting around $20-40 billion in the subsequent 18 to 24 months. This inflow was expected to make Indian bonds more accessible to foreign investors and potentially strengthen the rupee, thereby bolstering the economy, Morningstar’s Srivastava said.
Overall, FPIs started the year, 2023-24 on a positive note in April and incessantly purchased equities till August on the resilience of the Indian economy amid an uncertain global macro backdrop. During these five months, they brought in ₹1.62 lakh crore. After this, FPIs turned net sellers in September and the bearish stance continued in October too with an outflow of over ₹39,000 crore in these two months.
However, FPIs became net investors in November and the optimism persisted in December too, when they purchased equity to the tune of ₹66,135 crore. Again, they turned sellers and pulled out ₹25,743 crore in January.
This could be on account of China opening up after the lockdown. This led FPIs to pull out their investments from other emerging markets like India and divert them toward China.
However, China struggled to sustain investor interest. Moreover, the fiscal year ended on a positive note as FPIs bought shares worth over ₹35,000 crore in March.
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Indian Overseas Bank (IOB) has increased the interest rates on rupees retail term deposits up to 80 bps effective from January 15, 2024.
Now, among all public sector banks, IOB is offering the highest interest rates on rupee retail term deposit for 1 year to less than two years’ period, said a statement.
Depositors will get an interest rate of up to 7.65 per cent for the fresh term deposit opened for 1 year to less than 2 years’ period with IOB.
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(Bloomberg) — US equity futures edged higher while the dollar extended losses as trading resumed after the Christmas holiday amid investor expectations for earlier and deep interest rate cuts next year.
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Stocks in Asia were mixed in a thin trading session with markets including Hong Kong, New Zealand and Australia shut. Emerging Asian currencies rose, with South Korea’s won and Taiwan dollar leading gains against a weak dollar that fell to its lowest level in almost five months.
Some on Wall Street are positioning for further stock gains ahead as the session kicked off the start of the “Santa Claus rally” — a seasonal trend where equities tend to climb into the first few days of the new year. The S&P 500 notched an eight-week winning run on Friday — the longest in more than five years on signs price pressures in the US were easing. Ten-year US Treasury yields slid two basis points to 3.88%.
“As for emerging markets in Asia, ‘silent night’ says much, given that there isn’t particularly inspired trading, with Wall Street equivocating ahead of Christmas,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank. “It looks like a case of averting the China drag and hanging on to earlier Santa rallies being the best case for Boxing day – boxing in risks.”
Stocks fell in mainland China, with the benchmark CSI 300 Index headed for its first drop in four sessions, as investor sentiment remains weak even after the authorities softened their stance following a move last week to tighten curbs on the videogame industry.
Elsewhere, Singapore dollar was little changed after core inflation edged lower in November, giving the central bank room to extend its monetary-policy pause next month to support the economy.
Japan’s auction of two-year sovereign debt saw tepid investor appetite, sending a gauge of demand to the weakest in a year, amid speculation the central bank will end negative interest rates in 2024. Its labor market remained relatively tight in November, keeping pressure on employers to boost wages in order to fill positions.
The benchmark Topix index traded within tight ranges after Bank of Japan Governor Kazuo Ueda’s speech on Monday that suggested he’s in no hurry to end the ultra-easy monetary policy.
“With the Nikkei 225 at high levels, year-end selling to lock in profits and losses is likely to weigh on the upside,” says Hideyuki Ishiguro, senior strategist at Nomura Asset Management.
In the corporate world, Chinese gaming shares outperformed the benchmark after a number of companies announced plans to repurchase their shares following news of the latest government curbs on the sector. Cathie Wood last week made her first purchase of shares in LY Corp. in over a year, indicating a possible shift toward more positive sentiment on the operator of Yahoo! Japan and popular messaging app Line.
Iron ore futures hit $140 a ton, highest in 18 months as traders keep a close eye on China’s steel outlook for the next year. Oil rose slightly after posting the largest weekly gain in more than two months, with shipping disruptions in the Red Sea in focus after a spate of Houthi attacks against vessels in the vital waterway.
Geopolitical tensions still remain front of investors minds into the new year as tensions in the Middle East look set to increase. Iranian President Ebrahim Raisi said Israel will pay a price for killing a senior commander of its Revolutionary Guard in air strike in Damascus on Monday. The US accused Iran at the weekend of an attack on a tanker in the Indian Ocean.
READ: Israel Sees Defense Spending Climbing $8 Billion as War Rages
US Growth Resilience
Global markets have been buoyed in recent months as traders bet major central banks including the Federal Reserve will aggressively cut interest rates next year as inflation falls. Bond yields have tumbled while the S&P 500 is nearing a fresh record.
Data released last week showed signs of resilience in US growth while the Fed’s preferred underlying inflation metric barely rose in November. Additional reports Friday showed consumers were also gaining conviction that inflation in the world’s largest economy was on the right track despite a bumpy housing market recovery.
That helped cement investor expectations for earlier and deeper interest rate cuts next year, despite pushback from several Fed policymakers. Swaps traders are betting interest rates will be eased by more than 150 basis points in 2024, double the Fed’s forecast.
Read more: Fed’s Preferred Inflation Gauges Cool, Reinforcing Rate-Cut Tilt
Key events this week:
BOJ releases summery of opinions from December meeting, Wednesday
China industrial profits, Wednesday
Norway retail sales, Wednesday
Japan industrial production, Thursday
South Korea industrial production, Thursday
Thailand trade, Thursday
Mexico unemployment, Thursday
Bank of Portugal releases quarterly report on banking system, Thursday
South Korea CPI, Friday
Spain CPI, Friday
UK nationwide house prices, Friday
Brazil unemployment, Friday
Chile unemployment, Friday
Colombia unemployment, Friday
Some moves in major markets:
Stocks
S&P 500 futures rose 0.1% as of 6:30 a.m. London time
The Shanghai Composite fell 0.7%
Nasdaq 100 futures rose 0.3%
Australia’s S&P/ASX 200 was little changed
Currencies
The Bloomberg Dollar Spot Index fell 0.1%
The euro rose 0.2% to $1.1025
The Japanese yen was little changed at 142.25 per dollar
The offshore yuan was little changed at 7.1467 per dollar
The Australian dollar rose 0.3% to $0.6816
The British pound rose 0.1% to $1.2707
Cryptocurrencies
Bitcoin fell 2% to $42,674.63
Ether fell 1.9% to $2,229.68
Bonds
The yield on 10-year Treasuries declined two basis points to 3.88%
Japan’s 10-year yield advanced two basis points to 0.630%
Australia’s 10-year yield was unchanged at 4.01%
Commodities
West Texas Intermediate crude rose 0.3% to $73.75 a barrel
Spot gold rose 0.5% to $2,064.35 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Akemi Terukina.
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©2023 Bloomberg L.P.
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The Federal Reserve kept its key interest rate unchanged Wednesday for a third straight time, a sign that it is likely done raising rates after having imposed the fastest string of increases in four decades to fight painfully high inflation.
The Fed’s policymakers also signaled that they expect to make three quarter-point cuts to their benchmark interest rate next year. Those envisioned rate cuts — which wouldn’t likely begin until the second half of 2024 — suggest that the officials think high borrowing rates will still be needed for much of next year to further slow spending and inflation.
In a statement it issued after its 19-member policy committee met Wednesday, the Fed said “inflation has eased over the past year but remains elevated.” It was the first time since inflation first spiked in 2021 that the Fed has formally acknowledged progress in its fight against accelerating prices. It also provided a hint that its rate-cut efforts may be over, saying it is considering whether “any additional” hikes are needed.
The Fed kept its benchmark rate at about 5.4%, its highest level in 22 years, a rate that has led to much higher costs for mortgages, auto loans, business borrowing and many other forms of credit. Higher mortgage rates have sharply reduced home sales. Spending on appliances and other expensive goods that people often buy on credit has also declined.
So far, the Fed has achieved what few observers had thought possible a year ago: Inflation has tumbled without an accompanying surge in unemployment or a recession, which typically coincide with a central bank’s efforts to cool the economy and curb inflation. Though inflation remains above the Fed’s 2% target, it has declined faster than Fed officials had expected, allowing them to keep rates unchanged and wait to see if price increases continue to ease.
At the same time, the government’s latest report on consumer prices showed that inflation in some areas, particularly health care, apartment rents, restaurant meals and other services, remains persistently high, one reason why Fed Chair Jerome Powell is reluctant to signal that policymakers are prepared to cut rates anytime soon.
On Wednesday, the Fed’s quarterly economic projections showed that its officials envision a “soft landing” for the economy, in which inflation would continue its decline toward the central bank’s 2% target without causing a steep downturn. The forecasts showed that the policymakers expect to cut their benchmark rate to 4.6% by the end of 2024 — three quarter-point reductions from its current level.
A sharp economic slowdown could prompt even faster rate reductions. So far, though, there is no sign that a downturn is imminent.
In its quarterly projections, the Fed’s policymakers now expect “core” inflation, according to its preferred measure, to fall to just 2.4% by the end of 2024, down from a 2.6% forecast in September. Core inflation, which excludes volatile food and energy costs, is considered a better gauge to inflation’s future path.
The policymakers foresee unemployment rising to 4.1% next year, from its current 3.7%, which would still be a low level historically. They project that the economy will expand at a modest 1.4% next year and 1.8% in 2025.
Interest rate cuts by the Fed, whenever they happen, would reduce borrowing costs across the economy. Stock prices could rise, too, though share prices have already rallied in expectation of rate cuts, potentially limiting any further increases.
Powell, though, has recently downplayed the idea that rate reductions are nearing. He hasn’t yet even signaled that the Fed is conclusively done with its hikes.
One reason the Fed might be able to cut rates next year, even if the economy plows ahead, would be if inflation kept falling, as expected. A steady slowdown in price increases would have the effect of raising inflation-adjusted interest rates, thereby making borrowing costs higher than the Fed intends. Reducing rates, in this scenario, would simply keep inflation-adjusted borrowing costs from rising.
Recent economic data have modestly cooled financial markets’ expectations for early rate cuts. Last week’s jobs report for November showed that the unemployment rate fell to 3.7%, near a half-century low, down from 3.9% as businesses engaged in solid hiring. Such a low unemployment rate could force companies to keep raising pay to find and retain workers, which would fuel inflationary pressures.
And consumer prices were mostly unchanged last month, the government said Tuesday, suggesting that while inflation is likely headed back to the Fed’s 2% target, it might take longer than optimists expect. The central bank, as a result, could opt to keep rates at their current level to try to ensure that prices resume their downward path.
The Fed is the first of several major central banks to meet this week, with others also expected to keep their rates on hold. Both the European Central Bank and the Bank of England will decide on their next moves Thursday.
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The “Magnificent Seven” stocks — Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Nvidia (NVDA), and Tesla (TSLA) — are the big drivers of this year’s market rally. With five weeks left in 2023, the S&P 500 (^GSPC) is up 19%.
Investors scooped up shares of megacap tech names throughout the year amid macro uncertainty, driven in part by the Fed’s aggressive interest rate hiking campaign.
Looking ahead to 2024, strategists are split on future returns. Morgan Stanley’s Mike Wilson, a staunch bear, sees stocks essentially flat while Goldman Sachs’ David Kostin sees limited upside, predicting the benchmark index will reach 4,700 by the end of 2024.
On the other hand, Bank of America and RBC strategists are more bullish. Bank of America’s Savita Subramanian and her team forecast the S&P 500 to reach a record of 5,000 as investors move beyond “maximum macro uncertainty.” RBC’s Lori Calvasina also sees the S&P 500 reaching 5,000, writing in a note to clients: “Our valuation and sentiment work are sending constructive signals.”
So what does all this mean for investors’ playbooks in 2024? Yahoo Finance Live put that question to some Yahoo Finance Live regulars — here’s a roundup of some big ideas and themes to consider for 2024.
The “Magnificent Seven” mega-cap stocks played an outsized role in this year’s rally. The group has a combined weighting of 28% in the S&P 500, so their outperformance, largely driven by excitement surrounding artificial intelligence, dominated the performance of the broader index.
But whether or tech still has room to run is a hotly debated subject on Wall Street.
DoubleLine CEO Jeffrey Gundlach is in the bear camp, warning investors that the group will be among the “worst performers in the upcoming recession.”
“Whatever is leading the charge going into the economic downturn invariably must lead the charge on the way down. I would get out of them,” Gundlach said at Yahoo Finance’s Invest conference earlier this month.
His advice for investors: “Go into an equal-weighted basket as opposed to a market-weighted basket … and gradually diversify. … In particular, I would start thinking about emerging markets once the dollar index starts to fall, which has not happened yet. But it’s going to happen in the next recession.”
Read more: How to start investing: A step-by-step guide
But others, including Goldman Sachs chief US equity strategist David Kostin, see the megacap group outperforming once again.
“The 7 stocks have faster expected sales growth, higher margins, a greater re-investment ratio, and stronger balance sheets than the other 493 stocks and trade at a relative valuation in line with recent averages after accounting for expected growth,” Kostin wrote in the firm’s 2024 outlook.
China’s stock market has struggled this year amid a lackluster economic recovery. The MSCI China Index has fallen more than 9% since Jan. 1.
But that could change in 2024, according to Charles Schwab strategist Jeffrey Kleintop.
Kleintop cited corporate investment in China, productive talks between President Biden and Chinese leader Xi Jinping, and economic stimulus as reasons to be more optimistic on the region.
“Broader support across the markets in Asia is really interesting right now. … That’s where I’m finding more opportunities and lower valuations,” Kleintop told Yahoo Finance Live. “Companies that are braced for a more different economic environment and one that I think we’re likely to see in 2024.”
While Kleintop’s outlook for China is brighter, he does caution investors to prepare for a “bumpy ride” given China’s historical volatility and unique challenges.
For specific plays, UBS strategist Andrew Garthwaite sees beaten-down Chinese internet stocks set for a turnaround. Garthwaite wrote in the bank’s 2024 outlook that the group’s “performance has lagged EPS momentum.”
Hard-hit areas of the market are a buying opportunity for investors as the Federal Reserve halts its rate-hiking campaign, according to eToro strategist Ben Laidler.
“The further we get into next year and the closer we get to the Fed cutting, look at those cheaper interest rate sensitive plays like real estate, banks, and small caps,” Laidler told Yahoo Finance.
October’s cooler inflation data prompted traders to move up expectations for Fed rate cuts to May, sending small caps surging earlier this month. The Russell 2000 (^RUT) rose over 5% last week.
Laidler’s comments on small caps were echoed by RBC capital markets head of US equity strategy Lori Calvasina. Calvasina told Yahoo Finance earlier this month that easing cycles typically help small caps. She and her team at RBC view the group as well positioned for the longer term.
“They tend to lag late in economic cycles and so there’s really a sense when times get dicey that’s when you want to go bargain hunting in the small-cap space,” Calvasina added.
The S&P 500 is set to reach a new record by June of next year and consumer discretionary is a top way to play the index’s gains, JPMorgan Private Bank US equity strategist Abby Yoder told Yahoo Finance Live.
“You have all of these bears coming out saying the consumer is slowing, which we do agree with, but it’s slowing from very, very high levels,” Yoder said. “The sector has already been through an earnings recession period. … We expect a reacceleration on the top line along with margin support.”
It’s a contrarian call given the long list of retailers warning about a weakening consumer this holiday season. Best Buy, Macy’s, Walmart, and Target were among those flagging a shift in spending trends amid persistent inflation.
Starting the year with an investment plan always makes sense, but given uncertainty about interest rates, along with heightened geopolitical risk and the upcoming 2024 election, Truist chief market strategist Keith Lerner is wary about what’s ahead.
“Be ready to shift,” Lerner told Yahoo Finance. “We have all these remaining crosscurrents still in place — lagged impact of Fed policy, the election year, geopolitics, and ultimately which way the economy breaks. … This will likely force investors to be more tactical.”
If 2023 is a guide, it’s nearly impossible to predict the future. Unforeseen events prompted forecasters to adjust their outlooks and strategies on numerous occasions throughout the year. Remember, many CEOs, economists and strategists were convinced a recession was on the horizon, and nearly a year later, we still have yet to see it.
Seana Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, mergers, activist situations, or anything else? Email seanasmith@yahooinc.com.
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new video loaded: Federal Reserve Continues to Hold Interest Rates Steady
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My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power. Reducing inflation is likely to require a period of below potential growth and some softening of labor market conditions. The committee decided at today’s meeting to maintain the target range for the federal funds rate at 5.25 to 5.5 percent, and to continue the process of significantly reducing our securities holdings. We are committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation sustainably down to 2 percent over time. Inflation has moderated since the middle of last year, and readings over the summer were quite favorable. But a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal. Price stability is the responsibility of the Federal Reserve. Without price stability, the economy does not work for anyone.
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(Bloomberg) — The interest rate that neither spurs nor slows the US economy has at least doubled in the aftermath of the pandemic, handing investors a reason to be nervous about buying bonds or stocks, according to the latest Bloomberg Markets Live Pulse survey.
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Some 85% of 528 respondents reckon the so-called real neutral rate — which strips out the effect of inflation — has risen to around 100 basis points or higher, from estimates of about 50 basis points before Covid struck.
Federal Reserve Chair Jerome Powell said in March that “honestly, we don’t know” where the neutral rate lies. But if the resilient US economy has pushed it above what has prevailed historically, that adds to the case for the central bank to keep monetary policy tighter for longer — crimping the value of stocks and bonds.
Both asset classes have been getting battered of late as investors have absorbed the prospect of an extended period of higher interest rates. Ten-year Treasury yields briefly eclipsed 5% last week for the first time since 2007, fueling concern over technology-stock valuations in particular. Meanwhile, both the S&P 500 Index and the tech-heavy Nasdaq 100 entered a correction.
For 10-year Treasuries, survey participants have little expectation the pressure will ease. The maturity will likely end the year yielding 5%, according to the median forecast of respondents. More than 60% of poll participants say that both the S&P 500 and the Nasdaq 100 are overvalued, while some 15% estimate that valuations are stretched only for technology stocks.
The Nasdaq 100 will decline by as much as 10% this quarter, according to 45% of respondents. A fifth say it will slump more than that. Earlier in the year, enthusiasm surrounding artificial intelligence spurred investors to overlook rising interest rates, propelling the Nasdaq 100 about 35% higher in the first three quarters of the year. It’s now on track for its third straight monthly decline, something it hasn’t done in more than a year. And by one calculation, the technology complex is still overvalued by 10% as of the close on Friday.
The poll’s findings gel with a report from Bloomberg Economics that concluded the real neutral rate will climb to as much as 2.7% in the 2030s. In turn, according to the study, 10-year Treasury yields could settle somewhere between 4.5% and 5%.
As they did in December 2019, Fed officials estimate a long-run funds rate of 2.5% while assuming inflation of 2%, implicitly projecting a neutral real rate of 50 basis points. The neutral rate may have risen because of a host of factors, on top of the economy’s strength: Baby boomers are retiring and spending down their nest eggs, diminishing the supply of savings; China’s appetite for Treasuries is waning; and widening government deficits are increasing competition for investment capital.
What’s more, uncertainty about the future in the wake of the pandemic has spurred consumers to spend now and save later — a phenomenon known as high time preference. Essentially, that means consumers will seek higher interest rates to invest and forgo current spending, pushing the neutral rate higher.
A narrow majority of survey respondents are pessimistic about the implications of higher Treasury yields. This group projects that if yields stay above 5% for a quarter or longer, they would cause a hard landing, a scenario where the Fed’s actions to tame inflation trigger a recession. Some 47% say the economy would take it in stride.
The topic of elevated yields is likely to come up during Powell’s press conference after the central bank’s Nov. 1 policy decision, when officials are widely expected to hold rates steady at the highest in more than two decades. Investors will watch to see whether Powell comments on the Fed’s comfort level with the recent surge in yields and what that implies for the prospect of a soft landing.
Against the backdrop of elevated Treasury yields and the Fed’s message of higher for longer, almost 60% of survey respondents said they anticipate the dollar will be a stronger a month from now.
The MLIV Pulse survey of Bloomberg News readers on the terminal and online is conducted weekly by Bloomberg’s Markets Live team, which also runs the MLIV blog. Ven Ram is a cross-asset strategist for Bloomberg’s Markets Live. The observations are his own and not intended as investment advice. To subscribe for more MLIV Pulse surveys, click here.
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©2023 Bloomberg L.P.
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new video loaded: Fed Will ‘Proceed Carefully’ on More Rate Increases, Powell Says
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It is the Fed’s job to bring inflation down to our 2 percent goal, and we will do so. We have tightened policy significantly over the past year. Although inflation has moved down from its peak, a welcome development, it remains too high. We are prepared to raise rates further, if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective. At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks. Based on this assessment, we will proceed carefully as we decide whether to tighten further or instead to hold the policy rate constant and await further data. Restoring price stability is essential to achieving both sides of our dual mandate. We will need price stability to achieve a sustained period of strong labor market conditions that benefit all. And we will keep at it until the job is done.
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During a news conference, Jerome H. Powell, the Federal Reserve chair, opened the door to possibly pausing future rate hikes.
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Jerome H. Powell said that the Federal Reserve raised interest rates to combat inflation amid turmoil in the banking system.
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