Don't let your politics affect your investing; Big jump in consumer sentiment; The housing market is turning; A wave of loan repricings
1) Yesterday I came across two charts that underscore what I've written about previously – how much someone's politics affect their views on economic matters...
Here's a stunning chart from the New York Times that shows how Democrats and Republicans have nearly polar opposite views of the economy, depending on whether their guy was/is president:
And here's another chart from Trahan Macro Research showing that as soon as President Joe Biden was elected, inflation expectations among Republicans – and, to a lesser extent, independents – soared, while Democrats were far more sanguine... And today, while the gap has narrowed, the former still expect nearly twice as much inflation as the latter over the next year:
I'm not expressing an opinion on which side is right or wrong.
Rather, my point is that if you want to be a successful investor over time, you can't let your emotions – which include your political leanings – affect your analysis of economic factors and your investment decision making.
From 2017 to 2020, my message to Democrats would have been: Don't let your hatred of the president cause you to become bearish and position your portfolio for a crash.
And today, my message to Republicans is identical.
2) In my January 3 e-mail, I laid out my case for why I remain constructive on stocks.
Since then, the outlook has only gotten better – which is why all three major indexes recently hit all-time highs, with the S&P 500 Index alone adding $10 trillion of value just since October (when professional investors were positioned precisely wrong, sitting on large amounts of cash):
Perhaps in part reflecting rising brokerage accounts, the most widely followed gauge of consumer sentiment just had its biggest two-month jump in 33 years. Take a look at this chart from the Wall Street Journal:
This WSJ article containing the above chart explores some of the reasons why: Americans Are Suddenly a Lot More Upbeat About the Economy. Excerpt:
Unemployment is historically low, and hiring is still strong. What has changed is that inflation is cooling rapidly, while mortgage rates are down sharply from last year and the S&P 500 rose to a record high Friday...
Consumers' expectations for inflation a year ahead dropped to 2.9% in January, the lowest level since December 2020, and down from 4.5% in November, according to the Michigan survey.
Fannie Mae's index of home-buying sentiment jumped 10% in December from a year earlier. That was driven in part by a surge in the share of consumers anticipating lower mortgage rates over the next year.
3) It looks like the housing market may provide a tailwind for the economy going forward...
As the rate on a traditional 30-year, fixed-rate mortgage spiked from less than 3% to nearly 8%, the market for existing homes – one of the largest markets in the world – crashed because buyers couldn't afford the much-higher monthly payments and homeowners didn't want to sell because they would lose their wonderful and valuable 3% mortgages.
As a result, by December, existing-home sales had tumbled 42.4% to the lowest level since the global financial crisis, as this post by Charles Schwab Chief Investment Strategist Liz Ann Sonders shows:
However, mortgage rates have pulled back by 0.76% in the past 12 weeks – the sharpest decline since 2009:
If this trend of lower mortgage rates continues, which I think is likely, the existing-home market could boom.
Meanwhile, builders of new homes are ramping up production to meet demand:
4) Lastly, lower interest rates are a lifeline for riskier companies, as this WSJ article notes: A Hot Debt Market Is Slashing Borrowing Costs for Riskier Companies. Excerpt:
Prices of so-called leveraged loans, which are often used to fund private-equity buyouts, have climbed especially high, in part because a slowdown in those deals has led to lack of new loans entering the market.
The enthusiasm has gone so far that investors are willing to accept lower rates on some of the loans they own rather than give them up. And businesses have been able to take advantage, thanks to terms that make their loans extremely easy to refinance just months after they were issued...
The wave of rate adjustments, known on Wall Street as repricings, is just the latest evidence that the Fed's campaign against inflation hasn't dealt as hard a blow to indebted companies as Wall Street had initially feared.
Best regards,
Whitney
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