On the heels of our latest CIO Letter, Transitory, the Federal Reserve’s Federal Open Market Committee concluded its latest policy meeting today with no change to short-term interest rates. The Fed will continue buying $120 billion of Treasury and mortgage-backed securities per month. While acknowledging the recent rise in inflation, once again the term transitory was used to describe the current rise in prices. References continue to be made to the pandemic and the risks to the economy that a resurgence would pose, clearly aligning future economic prospects with the path of the virus. Lastly, the FOMC reiterated its tolerance for above-target inflation, with the goal of realizing once again “maximum employment”.
The current Fed Dot Plots show the potential for a rate hike in late 2022, followed by one or two more in 2023. Monetary policy continues to be highly accommodative at this point, and should remain a tail-wind for risk assets for the near future. Both bonds and stocks initially sold off on the announcement, but quickly recovered some of their declines.
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Written by: Matthew J. Krajna, CFA
The state of the housing market nationwide can be best described as nothing short of robust. Demand remains intense, and supply remains, well, in short supply. According to the National Association of Homebuilders (NAHB), homebuilder sentiment hit 83 in May, remaining elevated at above-average levels. Each of the past nine months has shown readings above 80, after hitting a record high of 90 back in November. Traffic also remains robust, with the Traffic sub-index hitting 73, also remaining elevated, with eight of the past nine months posting readings above 70. Readings above 50 signal builders view conditions as favorable. Average monthly inventory stands at 2.4 months’ worth of supply according to the National Association of Realtors, not far off of the record low of 1.9 months hit in December, down from 4.2 months in March 2020. These dynamics have led to higher prices, with existing home sales rising +19.1% year over year in April, with an average selling price of $341,600. Homes are selling at a break-neck pace, with the typical home sold last month spending barely 17 days on the market.
Stimulus checks and pent-up savings continue to bode well for the entire housing-related supply chain as homeowners continue to reinvest in their homes, both with added savings and stimulus, as well as for prospects of higher home values. Positive dynamics stem from more than just supply and demand imbalances. Low-interest rates should continue to persist for some time, even if they creep up slightly. According to Freddie Mac, the latest 30-year fixed-rate mortgage rate of 3.0% remained below the pre-pandemic high of 3.72% on January 2, 2020. Even if rates were to rise 0.75%, they would be just getting back to their pre-COVID highs.
A broad measure of housing, the S&P Homebuilders Select Industry Index has been a strong performer year to date, handily outpacing the S&P 500. As of May 19. 2021, the S&P Homebuilders Select Industry Index ETF had returned +26.22% versus +10.25% for the S&P 500 ETF. Strength in the Homebuilder Index has been broad-based, coming from all sub-industry groups.
With quarterly earnings season nearing a close, we’ve effectively heard from the entire supply chain within the Homebuilding ecosystem. Demand remains robust for inputs (i.e. home furnishings, appliances, materials, etc.) and outputs (i.e. new homes). Inflationary pressures are generally being passed along to consumers, through higher prices and smaller square footage of new homes. Many companies are expecting margin expansion this year due to strong demand, lesser COVID related costs, and operating leverage. As such, we’ve seen a significant amount of index constituents increase their revenue and earnings per share (EPS) guidance for 2021, which continues to bode well for the entire homebuilding related category. Couple this with relatively attractive valuations and strong secular tailwinds, and homebuilding remains a favorable tactical exposure in client portfolios, not to mention a potential inflation hedge moving forward.
As the social responsibilities of corporations receive more attention, and stakeholders hold companies liable for any negative externalities borne by society, business executives have begun paying more attention to outside concerns over how their companies should be run.
Nottingham’s investment philosophy is designed to deliver superior risk-adjusted returns over a business cycle when compared to a strategy’s respective benchmark. Our philosophy has been consistently implemented through a core-satellite, or strategic-tactical approach to portfolio
Written by Portfolio Manager Matthew Krajna, Select Managers review is issued to provide color to both strategy and individual fund performance and highlight any portfolio changes that have been made throughout the period.
Nottingham’s Chief Investment Officer Larry Whistler, CFA was highlighted in The Wall Street Transcript on May 8, 2017, discussing how Nottingham manages risk in our portfolios through the use of a factor based approach. Click below to read the interview.
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