History Is Telling Us to Expect a Strong 12 Months

The housing market is in a strange spot...

Since March 2022, the Federal Reserve has rapidly hiked interest rates from 0% to 5%. It has been one of the fastest tightening cycles – where the Fed uses its tools to remove liquidity from the financial system – in history.

We've seen the impact of these moves on stocks and bonds. But let's consider how the U.S. housing market itself is faring.

Headline No. 1:

U.S. housing starts saw their greatest surge since 2016 in May.

McCall's Call: For most of 2021, the average interest rate on a 30-year fixed mortgage in the U.S. hovered around 3%. But all that changed when the Fed hiked interest rates.

Now, you'd be lucky to get a mortgage with less than a 6.5% rate.

As you can see below, this has led to a steep decline in mortgage applications (the light blue shaded area) as rates have risen (the dark blue line).

Folks aren't taking out as many mortgages as they were a few years ago. And with the rapid rise in interest rates, they aren't listing their homes for sale either.

The chart below shows that the number of homes for sale in the U.S. is only slightly above its decadelong lows.

This makes sense. Folks don't want to give up their low-interest-rate mortgages to lock in one at a much higher rate. So if they don't have to sell... they simply won't.

That puts new buyers in a tough position.

Not only are they fighting over a smaller pool of available homes, but the shortage has created what's known as a "sellers' market." That means sellers can ask for more from buyers – sometimes more than what the home is truly worth.

But bad news for buyers is good news for homebuilders. They can build new homes to meet housing demand. And recent data shows they're doing just that...

We learned yesterday that U.S. housing starts – a good measure of new-home construction – surged last month by the most since 2016. New-home construction was up nearly 22% to an annualized rate of 1.63 million new builds.

That handily topped analysts' expectations for an annualized rate of 1.4 million housing starts. Applications for new construction also climbed by about 5% in May to 1.49 million, which topped expectations of 1.42 million.

So all in all, it was a strong report for the housing sector. And I don't expect the trend to lose steam until the Fed backs off its interest-rate-hiking path and begins to lower rates. That's when long-term mortgage rates will turn lower.

There are several ways to play this new wave of demand for homebuilders...

You can keep an eye on the iShares U.S. Home Construction Fund (ITB), which is an exchange-traded fund that tracks the industry.

But I also like watching how individual stocks are performing. Home Depot (HD), Sherwin-Williams (SHW), Masco (MAS), Lennar (LEN), and Toll Brothers (TOL) are some worth keeping tabs on.

Homebuilders have a solid tailwind at their backs right now. It won't last forever, so this may be an opportunity worth taking advantage of sooner than later.

Headline No. 2:

The market's first-half strength spells good things for the second half of the year.

McCall's Call: The S&P 500 Index has had a strong start to 2023. It's up about 14% year to date, which is above the index's average annual gain of about 9%.

It also recently entered a new bull market – rising 20% from its October 2022 lows.

I'll take those gains any day. But history suggests that we may be just getting started...

Since 1950, the S&P 500 has returned more than 10% in the first six months of a year only 23 times. In 18 of those instances, the index was higher 12 months later – a 77% success rate.

Even better, the average gain during those 12 months across all 23 occurrences was 12%.

Carson Group's Chief Market Strategist Ryan Detrick recently shared a great table showing this performance on Twitter...

It's no secret that I'm bullish on stocks long term. But I'm not saying that more gains are a given. We still have another week and a half until the end of the month. And a sharp pullback during that time could mean that this indicator won't trigger a signal this year.

The last time stocks were up more than 10% in the first half of the year was in 2021 – and it was an outlier on the chart above. While the market marched higher for a few months, stocks ultimately fell 12% over the following 12 months as all major indexes entered a bear market.

Still, I like our odds here. History is a good indicator of what's to come. And if stocks remain strong through the end of June, there's a good chance that the market will head higher in the medium term...

I recently highlighted a technical indicator that's flashing a bullish signal. And I've continued to point out that inflation has been moving in the right direction in recent months.

The above chart is just one more reason we should be bullish on stocks right now.

As always, we could see some near-term profit-taking because of the market's recent strength. But I'm not worried about that. Stocks never go up in a straight line, and Detrick's chart shows that July has the lowest success rate for higher stocks (at least when it comes to this indicator).

But we don't invest with a one-month mindset. We're here for the long term.

The market has been volatile... and that will likely remain true in the near term. But patient investors who withstand the daily and weekly noise will be rewarded in the end.

Here's to the future,

Matt McCall
Editor, Daily Insight
June 21, 2023

Did You Miss My Latest Podcast?

June is almost over... and that means the first half of the year is nearly in the books. A lot has happened over the past six months. But one trend has consistently dominated the headlines – artificial intelligence ("AI"). The AI mania has taken the market by storm. And many related stocks have seen huge gains as a result. So on this episode of Making Money With Matt McCall, I take a deep dive into the AI boom.

I start things off with a discussion of the big question in the market... Is an AI bubble forming? I share my thoughts and provide facts to help back up my theory. I also list some of the biggest players in the AI space and have a little fun with ChatGPT. If you have any interest in AI and the investment opportunities it will create, this is an episode you don't want to miss.