Housing Market Recession

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In July 2022, existing-home sales were down 5.9% from June and 20.2% from one year ago. ~ National Association of Realtors

U.S. existing home sales fell for the sixth consecutive month in July 2022, the longest streak of declines in eight years, the National Association of Realtors reported. Higher mortgage rates and a shortage of available homes on the market have cooled the once red-hot housing market.

Existing-Home Sales data measures sales and prices of existing single-family homes for the nation overall. These figures include condos and co-ops, in addition to single-family homes.

The drop off is a clear sign that the formerly booming market has stalled. Moreover, home building is slowing and mortgage applications are falling as more potential buyers are deciding to stay on the sidelines. “We’re witnessing a housing recession in terms of declining home sales and home building,” said Lawerence Yun, chief economist for the National Association of Realtors. “However, it’s not a recession in home prices. Inventory remains tight and prices continue to rise nationally with nearly 40% of homes still commanding the full list price.”

As new and existing home sales are slowing, the relentless rise in house price are beginning to show signs of easing. The median sales price for a home fell in July, the first decline since January.

Higher borrowing cost has taken some of the air out of the market. The Federal Reserve has been raising interest rates to control inflation and mortgage rates have risen in response.

The combination of higher housing prices and rising interest rates has pushed housing affordability to its lowest level in decades.

Moreover, home builder confidence plunged to a new two-year low in August as higher interest rates, posting its eighth consecutive monthly decline.

Additionally, lingering supply chain problems and record home prices continue to exacerbate housing affordability challenges, the National Association of Home Builders reported, prompting some experts to warn that the housing market collapse could be far from over.

References:

  1. https://www.nar.realtor/newsroom/existing-home-sales-retreated-5-9-in-july
  2. https://www.forbes.com/sites/jonathanponciano/2022/08/15/housing-market-recession-is-here-home-builders-slash-prices-as-buyers-cancel-contracts-mortgage-rates-rise/

Rules to Pick Quality Stocks

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“For the individual investor, investing in low-cost, tax efficient, broad-based, capitalization-weighted index funds is still the best way to build an investment portfolio.” ~ Burton G. Malkiel, author “A Random Walk Down Wall Street”

Index funds serve investors far better than expensive, tax inefficient, actively managed funds, argues Burton G. Malkiel, author ” A Random Walk Down Wall Street”. By holding a portfolio of all stocks on the market, in the proportion to their relative size or capitalization, the investor would be guaranteed to realize market return.

Index funds generally provide higher net returns for investors than actively managed funds that try to beat the market. “You are much better off not buying individual stocks, but buying an index fund,” Malkiel wrote. When investors talk about “beating the market,” they mean getting returns — over time — that are higher than what the broader market achieves.

Malkiel believes investors are generally better off to buy-and-hold rather than trying to chase particular strategies or make short-term moves. One of the best ways to cut down on both trading costs and capital gains taxes is simply to invest for the long-term. Do your research and buy into stocks slowly so you get comfortable with them. Hold them for decades.

But, if you’re inclined to invest in individual stocks, what follows are Malkiel’s Rules for picking quality stocks

1. Confine stock purchases to companies that appear able to sustain above-average earnings growth for at least five years.

Malkiel says although it is a difficult job to do, picking stocks whose earnings grow should be the main objective of investors.

“Consistent growth not only increases the earnings and dividends of the company but may also increase the multiple that the market is willing to pay for those earnings. Thus, the purchaser of a stock whose earnings begin to grow rapidly has a potential double benefit—both the earnings and the multiple may increase,” he says.

2. Never pay more for a stock than can reasonably be justified by a firm foundation of value.

Malkiel says investors can roughly gauge when a stock seems to be reasonably priced so they can look at the market price-earnings multiple before making an investment decision.

“Buy stocks selling at multiples in line with, or not very much above, this ratio. Look for growth situations that the market has not already recognized by bidding the stock’s multiple to a large premium. If the growth actually takes place, you will often get a double bonus—both the earnings and the price-earnings multiple can rise,” he says.

Malkiel says investors should be cautious of stocks with very high multiples as many years of growth is already discounted in their prices.

“If earnings decline rather than grow, you can get double trouble—the multiple will drop along with the earnings. Buy stocks whose P/Es are low relative to their growth prospects. If you can be even reasonably accurate in picking companies that do indeed enjoy above-average growth, you will be rewarded with above average returns,” he said.

3. It helps to buy stocks with the kinds of stories of anticipated growth on which investors can build castles in the air.

Malkiel says investors are emotional human beings driven by greed, gambling instinct, hope, and fear in their stock market decisions. This is why successful investing demands both intellectual and psychological sharpness.

“The key to success is being where other investors will be, several months before they get there. So ask yourself whether the story about your stock is one that is likely to catch the fancy of the crowd. Can the story generate contagious dreams? Is it a story on which investors can build castles in the air—but castles in the air that really rest on a firm foundation?,” he says.

4. Trade as little as possible.

Malkiel says frequent switching accomplishes nothing but subsidizing the broker and increasing tax burden when investors do realize gains.

“I do not say, “Never sell a stock on which you have a gain.” The circumstances that led you to buy the stock may change, and, especially when it gets to tulip time in the market, many of your successful growth stocks may become overweight in your portfolio,” he says.

Hence, Malkiel says picking individual stocks is a fascinating game and investors should tilt the odds in their favor while protecting themselves from the excessive risk involved in high-multiple stocks.

The odds of anyone consistently beating the markets are very low. Therefore, the recommended strategy includes index funds as the core of your portfolio follow by picking stocks with the money you can afford to put at somewhat greater risk.

While “beating the market” is a pursuit that can lead you to substantially grow your wealth, it’s not healthy to make it the cornerstone of your life. Investing should serve a bigger purpose in your life — like achieving financial independence, helping to send your kids to college, or whatever else matters to you. When you have a nest egg to do that, it’s entirely possible that it’s time to stop focusing on “beating the market” and turn your attention elsewhere.

References:

  1. Burton G. Malkiel, A Random Walk Down Wall Street, W. W. Norton & Company, New York, 2015, pp. 261-262.
  2. https://economictimes.indiatimes.com/markets/stocks/news/burton-malkiels-rules-to-pick-quality-stocks-avoid-irrational-decisions/articleshow/91850408.cms

International Dividend Investing

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U.S. dividend stocks continue to sport relatively low yields compared with other assets, especially as bond yields climb amid the Federal Reserve’s rate-hike.

But, there are alternatives assets to U.S. dividend stocks…international stocks:

  • MSCI Europe index was yielding 3.4%,
  • Japan’s Nikkei 225 index was yielding 2%,
  • MSCI Emerging Markets index was at 3.1%.
  • S&P500 was yielding 1.6%.

“Outside the U.S., there’s more of a culture of returning capital to shareholders through dividends rather than buybacks,” says Julian McManus, a portfolio manager at Janus Henderson Investors.

International stocks offer an higher yield than U.S. equities, though there are risks. Early in the pandemic, for example, dividend cuts went much deeper overseas than they did in the U.S.

Additionally, most countries impose a withholding tax on dividends paid to nonresidents. However, those withholding taxes, in many cases, can be credited against the U.S. shareholder’s U.S. tax liability, according to Robert Willens, a New York–based accounting and tax expert.

Another risk international dividends pose is that they can be more apt to get cut in economic downturns.

U.S. investors face a trade-off when it comes to international dividends: higher yields with higher risk.

References:

  1. Lawrence C. Strauss, Why Income Seekers Should Consider International Stocks, Barron’s, August 5, 2022.
    https://www.barrons.com/articles/international-stocks-income-dividends-yield-51659585601

Be a Dreamer and Pursue Your Dreams

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If you’re not pursuing and building your dreams, you’ll spend your entire life working to pursue and build someone else’s.

The greatest accomplishments and historic achievements started as dreams and visions that motivated the dreamer or visionary to shape their thoughts, beliefs and actions into a powerful reality.

From the planes we fly, the cars we drive and the sporting events we stream, passionate dreamers and visionaries like Thomas A. Edison and Elon Musk have developed all the things we enjoy and take for granted today.

“All successful people, men and women, are big dreamers. They imagine what their future could be, ideal in every respect, and then they work every day toward their distant vision, that goal or purpose.”– Brian Tracy

Inflation and Political Silly Season

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40-year record high inflation of 9.1% is driving up the price of everything from gas to groceries, according to a recent Bureau of Labor Statistics report.

The consumer price index was unchanged in July, the first month without an increase since May 2020. But, this does not suggest that the inflation problem has gone away, despite political wishful thinking, states Brian Wesbury, Chief Economist, First Trust.

Energy prices surged 7.5% in June and then dropped 4.6% in July. That’s what you really need to know about inflation in the past two months. As a result, overall consumer prices soared 1.3% in June and then were unchanged in July. But a new inflation trend this doesn’t make. Looking at both June and July, combined, consumer prices rose at an annualized 8.1% rate. That is no different at all than the 8.1% annualized increase in April and May, before the extra surge in energy prices in June then the drop in July.

Some 96% of global economists said they expect the U.S. to face “high” or “very high” levels of inflation for the rest of the calendar year, according to a World Economic Forum (WEF) report. Inflation refers to when prices for consumers increase, thus driving down the purchasing power of consumers’ money.

If you look at the unchanged CPI in July and think the Federal Reserve is nearly done, you’re in for a big surprise, says Wesbury. The Fed isn’t close to done. Yes, the inflation rate likely peaked at 9.1% in June. But getting from 9.1% down to the 5 – 6% range by sometime next year is the relatively easy part. Getting from there back down near the Fed’s 2.0% target is the hard part. Rents have been increasing rapidly around the country and we don’t see that ending anytime soon, which will make it very tough for the Fed to reach its stated goal.

And, it’s delusional to think that the officially-called “Inflation Reduction Act” is actually going to reduce inflation. Inflation is a monetary phenomenon; the bill passed by the Democrat controlled Congress isn’t going to have any noticeable short-term impact on inflation.

Bottomline, regardless of political affiliations, the economy continues to grow and inflation remains a very serious problem. “Investors need to set aside their personal political preferences and follow economic reports as they are, not as they want them to be,” writes Wesbury.

  1. https://www.ftportfolios.com/Commentary/EconomicResearch/2022/8/15/silly-season

Recession and Political Silly Season

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The U.S. has entered the official political silly season which is when analysts interpret monthly and quarterly economic reports and data through a highly biased political lens, writes Brian Wesbury, Chief Economist, First Trust. Unfortunately, he submits that the real unbiased analysis of economic reports and data rarely emerges.

Wesbury opined that the silly season started with politicians from the right proclaiming that the country was in a recession because real GDP declined in both of the first and second quarters of calendar year 2022. These individuals purposely overlooked that the unemployment rate has dropped 0.4 percentage points so far this year. And they fail to notice that payrolls are up an average of 471,000 per month, while industrial production is up at a 5.2% annual rate over the first six months of the year. Never mind that “real” (inflation adjusted) gross domestic income was up in the first quarter.

Although, two quarters of negative real (inflation-adjusted) gross domestic product (GDP) growth is commonly viewed as a strong sign that a recession is underway, it is not the official definition.

***Recession are foremost and always a “broad based decline in economic activity”.***

The National Bureau of Economic Research (NBER), a private non-profit research organization that focuses on understanding the U.S. economy, views a recession as a monthly concept that takes account of a number of monthly indicators—such as employment, personal income, and industrial production—as well as quarterly GDP growth. Additionally, “a recession is the period between a peak of economic activity and its subsequent trough, or lowest point,” the NBER says on its website.

Therefore, while negative GDP growth and recessions closely track each other, the consideration by the NBER of the monthly indicators, especially employment, means that the identification of a recession with two consecutive quarters of negative GDP growth does not always hold.

Thus, the economy is currently not in a recession since the NBER’s defines officially a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

“Our view is that a recession is coming, that monetary policy will have to get unusually tight for the Federal Reserve to bring inflation back down to its 2.0% target,” states Wesbury. “In turn, tighter money should induce a recession. But that takes time and the recession hasn’t started yet.”

References:

  1. https://www.ftportfolios.com/Commentary/EconomicResearch/2022/8/15/silly-season
  2. https://www.bea.gov/help/glossary/recession

Timeless Investing Lessons

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“It is near impossible to consistently outperform the market, which supports passive investing in lieu of active management strategies.” ~ Burton G. Malkiel

  1. Buy and hold investments for the long-term. Investment expenses and taxes will eat away at your returns. It’s impossible to perfectly time the market. You will make mistakes. Buying total market index fund will include buying nonprofitable companis in the mix. And, historical analysis shows:
    • When markets are high is when most people put money into the market.
    • When markets are low is when most people take money out of the market.
  2. Timing the market doesn’t work. Timing the market means selling assets at the top of the market and buying the asset at the bottom of the market. Successfully trying to time the stock market has never earned. Thus, you should not try to time the market.
  3. Dollar cost averaging. DCA means putting money into the market regularly overtime.
  4. Broad Diversification. You do not want all your personal capital and savings invested in a single stock or a single asset class, such as stocks only. You should diversify your investment across different asset classes (stocks and bonds), industries and countries. You want to own both domestic and foreign stocks, bonds, real estate and some cash.
  5. Cost matters. The two variable costs you can control are investment costs and taxes. Jack Bogle said, “you get what you don’t pay for.” Since, the lower the expense ratio the investor pays the purveyor of investment services, the more capital that is left over for the investor. Look carefully at the expense ratio.
  6. Index funds. Buy a total market index fund with zero or low expenses. Two-thirds of active investment managers are beaten by stock index funds annually. Ninety percent of active investment managers are beaten by stock index funds over a ten year period.
  7. Buy bond substitutes instead of total bond index fund such as preferred stocks or high yielding dividend paying established companies.
  8. Rebalance annually or at least bi-annually. This requires you to sale highly appreciated assets to buy assets that have not appreciated greatly or are on sale.

These are just a few timeless investing lessons that invest can follow to build wealth

References:

  1. https://www.wallstreetprep.com/knowledge/random-walk-theory/

COVID-19 Rapid Antigen Tests: One negative test result inadequate

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“If there is concern you’re infected, and you want to make sure you’re not infected, one or two [home rapid antigen] tests is not enough. Do three tests to make sure you’re not infected.” ~ Dr. Apurv Soni, assistant professor of medicine at Chan

Performance of Rapid Antigen Tests for COVID-19 varies over the course of an infection. Anyone who gets a negative result for COVID-19 from an at-home rapid antigen test shouldn’t assume they’re not infected, and should keep testing, according to a safety recommendation from the U.S. Food and Drug Administration.

The guidance is based on research conducted by University of Massachusetts Chan Medical School and partners supported by the National Institutes of Health. The study included more than 5,000 people nationwide over age 2.

The study finds that if repeat testing isn’t done, an infection may be present and you could unknowingly spread COVID-19 to others, especially if you’re not experiencing symptoms.

Repeat testing, at least two, is recommended after a negative test for those who show COVID-19 symptoms and for those who are asymptomatic, but may have been exposed to the virus, at least three test are recommended.

For participants who do not have symptoms (asymptomatic), the study found that two additional tests – the first taken 48 hours after the negative result and the second 48 hours later – are more likely to detect COVID-19 during the first week of infection.

For those who were symptomatic, one additional test taken 48 hours after a negative test, the rate of detection was more than 90% when testing started within the first week of infection.

Among the asymptomatic that had an infection lasting at least two days based on PCR testing, repeat testing three times at 48-hour intervals, the rate of detection was 79% when testing started within the first week of infection.

What this means is to optimize detection of COVID-19 infection with home antigen tests, people should test twice at least 48-hours apart if they are symptomatic and three times at 48-hour intervals if they were asymptomatic.

“On a personal level, this study speaks to when antigen tests are useful and not useful, and how to use them,” said Dr. Apurv Soni, assistant professor of medicine at Chan and the study’s lead investigator.

Wear a face mask

Anyone suspected of contracting COVID-19 without showing symptoms should exercise caution by wearing a face mask and stay away from crowds, the study said.

They should continue that practice for at least six days until three at-home antigen tests taken 48 hours apart have been completed.

“If there is concern you’re infected, and you want to make sure you’re not infected, one or two tests is not enough,” said Dr. Soni. “Do three tests to make sure you’re not infected.”

References:

  1. Henry Schwan, At-home COVID tests: One negative result not enough, study says, Worcester Telegram & Gazette, August 12, 2022. https://news.yahoo.com/home-covid-tests-one-negative-161544916.html
  2. https://www.medrxiv.org/content/10.1101/2022.08.05.22278466v1