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Milan Cacic

May 19, 2022

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US REAL ESTATE HAS GOT TO GIVE?

There has been a lot of rhetoric coming out of the Federal Reserve regarding tightening financial conditions. Consensus is that the Federal Reserve will likely increase short-term interest rates by as much as 2.5%. This is on top of quantitative tightening that is set to begin June 1. The bond market has already priced in these rate hikes. Furthermore, as seen by the chart below, mortgage rates in the United States are up more than 70% year-to-date. Real estate does not have an immediate effect on the economy as it has a longer lag time than stocks. We believe that the Federal Reserve needs to be careful because it's hard to imagine that a 70% move in mortgage rates won’t have an effect on the US economy. Likely, there will be a fall or at least a stall in home prices, and a fall in consumer confidence as people feel less wealthy.

 

Source: Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; May 17, 2022

 

NOT EVERYTHING IS AS BAD AS PEOPLE THINK

When all the news seems to be negative, it can be hard to keep our emotions in check. Whether it's the war in the Ukraine, China’s lock-down, or investor sentiment being at an all-time low (this is a bullish indicator), we sometimes forget that things are actually pretty good. We are out of the COVID lock-down, the economy is growing and employment in the US and Canada is still very strong. We should also remember that households and businesses have amassed large amounts of cash during the pandemic and the subsequent recovery and corporate profits are at record levels. At some point the stock market we will break out of this malaise. I don’t know what yet, but there will be some sort of good news that breaks through the gloom and reminds us that everything will be okay. And when that does happen the chart below gives us a pretty good idea of how we can expect the market to react after this downturn. The chart illustrates that for each bear market for the past 35 years, the subsequent six month return after the market were positive.

 

 

Source: Weekly market wrap, Angelo Kourkafas, Edward Jones, May 2022

 

I have also included a piece from our CIBC Economics team in titled "CPI (Apr) No respite yet".

 

As always if you have any questions please feel free to give us a call at any time.

 

I hope everyone has a great long weekend.

 

Milan

 

Go Flames Go!

 

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CIBC Private Wealth” consists of services provided by CIBC and certain of its subsidiaries through CIBC Private Banking; CIBC Private Investment Counsel, a division of CIBC Asset Management Inc. (“CAM”); CIBC Trust Corporation; and CIBC Wood Gundy, a division of CIBC World Markets Inc. (“WMI”). CIBC Private Banking provides solutions from CIBC Investor Services Inc. (“ISI”), CAM and credit products. CIBC Private Wealth services are available to qualified individuals. Insurance services are only available through CIBC Wood Gundy Financial Services Inc. In Quebec, insurance services are only available through CIBC Wood Gundy Financial Services (Quebec) Inc.


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