Market Update - May 23, 2021
Hope all is well. The major stock indexes were mixed, with little overall change. Declines on the first three trading days of the week were largely offset by a rally on Thursday, leaving both the S&P 500 and the Dow around 1.5% below their record highs set two weeks earlier. For the first time in six weeks, the NASDAQ outperformed the S&P 500, and the U.S. large-cap growth stocks edged a large-cap value. Since this week’s news highlights two of the questions I get most frequently, I will take an opportunity to address both questions.
With markets near an all-time high should I go to the sidelines?
The recent run in the stock market has stock valuations stretched. A pull back is likely but will probably be too short lived to try and time it by moving in and out. It is best to stay invested at this point unless you’re planning to spend the money you have invested in the stock market in the short term (within the next year). Long term, stock valuations are sustainable. The average of price to earnings (P/E) ratio for the S&P 500 is 22. Still below what would be considered an extreme bubble. Looking back at bull markets since 1929, P/E ratios traditionally rise in the first year of a bull market, as optimism rises, then the ratio declines as earnings rebound. With expectations for earnings growth of roughly 30% in 2021, earnings (the E portion of P/E) appears to be in good shape. That means P/E ratios could drop to more normal levels while still supporting stock-market gains. The combination of valuations and earnings growth will produce positive but more moderate gains for stocks. Over the past 40 years, periods of accelerating earnings have often seen outperformance from value stocks, as they are more closely linked to economic momentum. That has been the case this year however I don’t expect that to continue because I believe the pandemic has changed the way we do business and I expect growth stocks to benefit just as much if not more from the economic momentum. That started to happen this week as technology stocks that had recently been lagging were among the latest week’s top performers.
Is now the time to sell my home?
Home sales are slowing down. Home prices have skyrocketed over the last year amid a significant jump in demand. Lower inventories (supply) and rising building-material costs have also added to price gains. On Friday we learned U.S. sales of existing homes fell 2.7% in April compared with the previous month, making it the third straight monthly decline but still up significantly year over year. Spring is a time of year when sales typically pick up so the decline has some concerned that they may have missed their opportunity to sell.
The last time home prices were on this type of year over year trajectory, a housing bubble became the catalyst for a financial crisis. We're not traveling the same path now. The pace slowing does not mean the boom is over. While the current pace of appreciation is likely not sustainable the demand for housing is. Home prices have skyrocketed over the last year because of a significant jump in demand. Lower inventories (supply) and rising building-material costs have also added to price gains. New and existing home sales are at their highest levels in more than a decade, reflecting the surge in demand. Falling unemployment, virtual work trends, and still-low mortgage rates should all support an enduring positive outlook for the housing market for the next several years. Of note, the average size of a new single-family home has also begun to rise for the first time in many years, likely reflecting the shift in home preferences sparked during the pandemic. Increased home buying activity, improving job growth, and an estimated $1.5 trillion in household savings should help keep the home prices from dropping.
During the housing bubble of 2008, there was too much supply compared with demand, and lending conditions were reckless. Currently, lending standards are much more prudent, and, most importantly, demand is outstripping supply, which should prevent an outcome like last time. Supply will eventually catch up. The spike in lumber prices appears to have abated and construction is getting back to pre-pandemic pace this will increase inventory. So in answer to the question it is a seller’s market but I don’t think you need to rush to sell because I think demand will continue to keep home prices growing albeit at a slower rate.
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