CWS Market Review – June 20, 2023

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Housing Starts Posts Largest Increase in 33 Years

We’ve been waiting for the housing market to hit rock bottom, and that may have happened. On Tuesday, the Commerce Department said that housing starts soared last month. It was the largest monthly increase in more than 33 years.

This comes at the same time that the Federal Reserve sees itself nearing the end of its rate-hike cycle. Last week, the Federal Reserve declined to raise interest rates. This was the first meeting in over a year in which the Fed decided to pass on a rate hike.

So far, the S&P 500 has been well behaved. At one point, the index reached a 16-month high. This happened even though the Fed stressed that it’s not done with its interest rate hikes. The S&P 500 is even getting to within 9% of a new all-time high.

This week, I want to focus on the Fed’s latest move because it reveals an interesting divide. The language coming from the Fed is very stern and hawkish, yet the expectations for what the Fed will actually do are much less so.

So who’s right? I don’t know, but I generally prefer to take the market’s view over what the Fed says it will do.

Still, there’s no need to be dogmatic on this issue and I concede that there are good reasons for the Fed to continue hiking. That case got a lot stronger this morning with the latest report on housing starts.

This is interesting to see because the housing market got completely walloped by the Fed’s rate hikes. The industry is gradually getting back on its feet.

For May, housing starts rose to 1.631 million. That’s quite good. Housing starts are now at their highest since April 2022. The number for April was revised down to 1.34 million. That increase of 291,000 was the biggest monthly jump since January 1990.

Not only that but building permits were up 5.2% last month. That was much better than expected. Permits are now at the highest level since October 2022. Suddenly, the housing market is getting hot. Of course, there’s been very little building going on, so at some point, the cycle needs to turn.

The difficult part about the Federal Reserve’s interest-rate policy is that it doesn’t impact the broad economy directly. Instead, the housing market stands in between the Fed and the economy. As a result, the housing market can be unfairly slammed whenever there’s an increase in inflation.

The Fed doesn’t meet for another five weeks, but the language coming from the Fed has already unnerved traders. A majority of Fed members thinks the central bank will have to increase rates two more times this year. Market participants disagree.

Inside the futures pits, traders can place bets on the direction of Fed policy. Right now, the latest prices imply a 77% chance that the Fed will hike rates by 0.25% at its meeting next month.

That’s probably right, but after July, the outlook gets a lot fuzzier. Traders simply don’t see the need for another rate hike after July. In fact, they see the Fed cutting rates by early next year. For 2024, traders see the Fed aggressively cutting rates. That’s due to fears of a recession.

Trex Is Up 40% YTD

Can we be headed for a recession if the housing market is getting better? It’s possible, but it’s unlikely. In fact, housing stocks have been rallying for several weeks. I like to keep an eye on the Home Construction ETF (ITB). It’s up over 66% in the last year.

The important thing about housing is that it touches so many different parts of the economy. From finance to lumber and materials to employment, so many economic sectors are beholden to housing.

On our Buy List, one of our favorite housing-related stocks is Trex (TREX). More housing starts means more decks to build. Thanks in part to the Fed, the deck-maker got completely wrecked last year. Not only was it our worst stock in 2022, but it was our worst stock by far.

Fortunately, we held on and Trex is up 40% for us this year. I think this is only the beginning. Last month, Trex said it made 38 cents per share for Q1. That beat Wall Street’s consensus by four cents per share. The stock popped 8% after the earnings came out.

For Q2, Trex said it expects sales to range between $310 million and $320 million. Wall Street had been expecting $309 million. The Q2 report will probably be out in early August.

Trex also got an important vote of confidence from its board of directors. The board approved a repurchase program of up to 10.8 million shares. That’s 10% of all the outstanding shares. This program has no expiration date.

For Q2, Wall Street expects earnings of 53 cents per share. I think we’ll see another nice beat. If the Fed starts lowering rates, that will be even better for Trex.

The Q2 earnings season will begin in less than one month. The upcoming earnings season will be an important one because it may show that not only are earnings growing again, but the rate of growth is increasing.

During last year, corporate earnings declined for Q2, Q3 and Q4. Inflation, the Fed, the war in Ukraine and the supply chain mess all took a toll on earnings growth. For Q1 of this year, the S&P 500 posted earnings growth of 6.4%. That was a relief. As of now, Wall Street expects Q2 earnings growth of 12.6%.

There is an important caveat. As in previous quarters, Wall Street is slashing its earnings estimate as earnings season approaches. Since the start of this year, analysts have pared back their Q2 forecasts by more than 13%. This is part of Wall Street’s typical game of lowering expectations so low that companies can easily exceed them and claim victory.

Interestingly, Wall Street hasn’t cut its forecasts for Q3 or Q4 very much. For this year, analysts expect the S&P 500 to post earnings of $218.22 per share. That’s the index-adjusted number. (Every one point in the index is worth $8.36 billion.) Over the last year, the earnings estimate for this year has been cut back by more than 12%.

For 2024, Wall Street sees the S&P 500 earning $244.81 per share. That means the S&P 500 is going for a tad under 18 times next year’s earnings. That’s not bad. I would expect the earnings multiple to increase if interest rates start to fall.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on June 20th, 2023 at 7:22 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.