New York, NY – US stocks staged a broad rebound on Thursday morning, clawing back some of the steep losses suffered in the previous session’s sharp sell-off, the steepest single-day decline since the early days of the pandemic in 2020.
The benchmark S&P 500 rose 0.8% at the open, mounting a comeback after its largest one-day drop since June 2020. The 30-stock Dow Jones Industrial Average climbed 0.7% in early trading, while the tech-heavy Nasdaq Composite gained 1.2%. Both indexes had seen their nine-day winning streaks snapped on Wednesday.
“There was no single smoking gun behind the sharp fall,” said John Smith, chief investment officer at ABC Capital. “Likely a confluence of factors were at play – concerns over a weaker economic outlook following FedEx’s disappointing guidance, year-end position squaring by institutional investors, options hedging. We view this as a healthy pullback and consolidation after an outsized run-up.”
The market has stuck to the conviction that the Fed is nearing the end of its rate-hike campaign despite repeated cautious messaging from policymakers. This persistent optimism kept stock valuations elevated until profit-taking kicked in earlier this week.
Micron Stock Pops After Upbeat Earnings Outlook Amid the broader market rebound, shares of memory chipmaker Micron Technology jumped over 8% to lead gainers on the S&P 500. The company forecast stronger-than-expected second quarter revenue, signaling a recovery for the struggling semiconductor industry in 2024 driven by rebounding prices after a painful slump.
Micron’s upbeat guidance reinforced investor hopes of a turnaround in the battered chip sector, which has been hammered by falling demand and excess inventories after pandemic-era supply shortages. The Philadelphia Semiconductor Index has plunged over 40% so far in 2022.
What’s Next for Stocks and Rates After the Fed Pivot
While the Fed’s decision in November to slow its pace of rate hikes fueled hopes that cuts could begin as early as March 2023, policymakers have continued to dash market optimism and reiterate that additional hikes are probable depending on the path of inflation and growth.
Most economists expect rates to peak around 5% in early 2023, before the central bank reverses course in the back half of the year as price pressures continue cooling and economic activity slows. Markets are currently pricing in rate cuts beginning in June 2023.
We see a continued tug-of-war between cautious Fed messaging and market hopes of rapid easing,” said Priya Misra, head of global rates strategy at TD Securities. “While risks are two-sided, we think any meaningful deterioration in activity or inflation should tilt the Fed toward pausing rate hikes, but not necessarily cutting quickly even in a recession.”
Goldman Sachs strategists forecast three 25 basis point rate cuts in 2024, in line with policymaker projections, noting that lingering labor market tightness may keep the Fed from rushing to lower rates too swiftly.
Mortgage Rates Slide Below 7% to Cheapest Since June
In housing market news, mortgage rates dropped back below 7% this week according to the latest weekly data from Freddie Mac. Rates on 30-year fixed-rate home loans fell to 6.67% in the week ending Dec 22nd, notching their eighth consecutive weekly decline. The current average rate is now at the cheapest level since early June 2022.
Mortgage rates have retreated more than a full percentage point after breaching 7% in October for the first time since 2002. While lower rates will provide some relief to distressed home buyers, analysts say housing affordability remains a major obstacle for many Americans.
“Unless it’s a really compelling rate climate, mortgage and housing activity does slow measurably this time of year as we enter the seasonal holiday effect,” said Keith Gumbinger, vice president of mortgage data firm HSH.com. “The good news is that rates are down, and at the best levels since summer. The bad news is that they are only as low as they were during the summer, which is not an especially compelling opportunity for most buyers or those looking to refinance.”
Housing Inventory Shortage Still Stymying Buyers
Despite cheaper borrowing costs, the ongoing inventory crunch in resale real estate markets continues to put upward pressure on home prices and limit choices for buyers. There were just 1.16 million existing homes available for sale in November, down 2.3% from October and nearly 40% lower than one year ago.
“Inventory remains low by historical standards,” noted Lawrence Yun, chief economist for the National Association of Realtors (NAR).
The total inventory of unsold new and existing homes represents just 3.3 months of supply at the current sales pace. Economists say a balanced market would have at least six months of housing inventory for sale. Until inventory improves substantially, home prices are likely to remain elevated and prevent a rapid recovery in sales activity.
Homebuilder Stocks Rally After Upbeat 2024 Forecasts
Shares of major homebuilders rallied on Thursday after JPMorgan lifted its December 2024 price targets across the sector. Analyst Michael Rehaut raised targets for PulteGroup (+19%), Toll Brothers (+18%), and other builders, citing brighter prospects for housing in 2024 amid expectations for Fed rate cuts and resilient construction demand.
The bank also increased its earnings per share (EPS) estimates for homebuilders in both 2024 and 2025 by 3% and 6%, respectively, noting:
“We believe the recent stronger rally in the sector has been not only driven by the substantial recent decline in mortgage interest rates, but also growing investor confidence towards a more constructive market outlook for 2024.”
Rehaut added that the improved forecast incorporates expectations for at least two Fed rate cuts by the end of next year along with resilient housing fundamentals and solid buyer demographics supporting construction activity.
Shares of large-cap homebuilders like D.R. Horton (DHI), Lennar (LEN), and NVR Inc. (NVR) have skyrocketed this year, gaining between 50-90% even as the broader stock market sank. More speculative small-cap builder stocks including Century Communities (CCS), Green Brick Partners (GRBK), and Meritage Homes (MTH) have logged even more outsized 80-140% returns year-to-date.
Housing Stocks Soar Despite Gloomy Predictions
The stellar run for housing and homebuilder stocks stands in stark contrast to the barrage of gloomy industry projections issued over the past year. As mortgage rates nearly doubled from 3% to over 7%, economists lining up to predict dire outcomes for real estate – crashing prices, plunging sales, a wave of foreclosures.
While activity has certainly cooled considerably and affordability severely dented by higher rates and stubbornly lofty home values, the most extreme bearish predictions have yet to materialize.
NAR forecasted home sales would plunge 15% in 2022 back in June when rates were still below 6%. Instead, existing home sales are only down about 8% year-over-year. New home sales have fared worse, down roughly 30% as builders cite dismal buyer traffic.
Home prices have likewise proven resilient, continuing to climb albeit at a slower pace than during 2021’s red-hot run-up. The median sale price for an existing home topped $400,000 for the first time ever in July and remains up nearly 8% from a year ago in November per NAR data, buoyed by ultra-low inventory conditions.
While the housing market has skirted disaster up to this point, it remains on fragile footing with properties staying listed longer and more sellers forced to cut asking prices. Economists caution the full brunt of much higher rates has yet to flow through to home values and may result in larger price declines in 2023.
Economic Outlook Still Murky Despite Rate Cut Hopes
As markets cheer the prospects for Fed easing in 2023, questions linger around the strength of the US economy after a series of mixed data points and falling business sentiment readings. While the labor market remains robust for now, cracks have started to emerge with tech sector job cuts piling up and housing-related industries shedding workers.
Manufacturing activity contracted for the first time since mid-2020 in November, with the Institute for Supply Management’s (ISM) factory index falling to 49 on slumping new orders and production. Services sector growth also cooled more than expected last month per ISM’s non-manufacturing gauge. Both indexes sit just above the 50 mark delineating expansion from contraction.
Following dismal preliminary PMI data earlier this month, economists have downgraded fourth quarter US GDP growth forecasts to around a 2.5% annualized pace from prior estimates above 3%. While still a solid clip, it would mark a considerable slowdown from Q3’s brisk 3.2% rate.
Morgan Stanley analysts also note that days in which 75% or more of S&P 500 member stocks decline, as occurred during Wednesday’s pullback, have historically preceded recessions by around eight months on average.
All told, while markets are optimistic the Fed Put will lift stocks anew in 2023, uncertainty still hangs over the economic outlook next year. Further data declines or corporate profit warnings could test investor conviction in the dovish policy pivot narrative underpinning recent gains.