Strong Dollar
What is it?
The U.S. dollar has had a strong year so far. Many equities have underperformed the dollar year to date.
Why does it matter?
We have discussed last week the importance of analyzing the different financial markets for clues about the health of the economy. The stock has seen a rebound over the summer which may be seen positively by some investors. Housing a strong dollar may contradict that view.
We believe that a strong dollar may be a flight to safety trade for investors. Here’s a chart comparing UUP (a US dollar index ETF – orange line) and GSPC (S&P 500 – blue line) during the Great Recession of 2008.
Source: Yahoo Finance
As you can observe, GSPC suffered major losses during the period while UUP did not.
Here’s the Year to Date comparison chart:
As you can see, UUP is again outperforming GSPC. With that information, we think that the currency market is signaling more pain for the stock market.
Weaker Housing
What is it?
The housing market was red hot not long ago. However, the contracting economy has cooled it down.
“Analysts from Bank of America are cutting their rating on shares of three homebuilders in a note out Thursday as the housing market faces an economic slowdown . . . as rising interest rates challenge affordability for buyers.”*
“Earlier this week, Toll Brothers reported quarterly results that revealed lower delivery expectations and increased incentives amid what CEO Douglas Yearley called ‘more of a buyer’s market.’”*
That came after new data indicates sellers are struggling to get the same price they were looking for a few months ago.
Why does it matter?
“In recent weeks there have been growing signs of a pullback in the broader U.S. housing market, in part because of rising mortgage rates and continued home-price appreciation locking out more buyers.”*
While some states and cities are doing better than others, the housing market as a whole is in a tough spot that may take a long time to recover.
“Nationally, more than 15% of home sellers slashed their listing price in July across 97 metros analyzed by Redfin.”*
The higher interest rates environment is proving to be difficult for builders. We believe that this struggle will be temporary as the inventory of new homes needs to continue to catch up to population growth. We may eventually be able purchase shares at much better prices in the future.
Other articles we found interesting this week:
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Our last portfolio reallocation: 5/19/2022.
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The weekly market insight provides a window into the process we use in our investment management process. At Breakaway, we believe markets are always changing and require a nimble yet data-oriented approach.
Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.
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Sources:
*Dani Romero. “Housing: BofA downgrades three homebuilders as housing downturn accelerates”. Yahoo Finance. https://finance.yahoo.com/news/housing-market-bank-of-america-downgrade-173236691.html
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