Are Millennials Saving the Housing Market?
Salesforce, Amgen, and Honeywell take the place of Exxon Mobil, Pfizer, and Raytheon. What does that mean? Three stocks came out of the Dow and three brand new stocks coming into the Dow.
Looking at what the market did in August, you would think that we were in the best economic time in your life! Things have been off the charts. Join me for this Monthly Economic Update where we’ll discuss the markets for August, understand how millennials are impacting the housing market, the disparity in certain sub-sectors, and my thoughts on the presidential election.
COVID-19 and the Real Estate Market
One of the first things that I want you to do is check out our website for an article that my brother Shane wrote on COVID-19 and its effects on real estate. One of the biggest questions is: What is the effect of COVID-19 going to be on commercial real estate? It will leak into the apartment buildings, the inner cities, and to the suburbs. Make sure to check out COVID-19 and the real estate market.
Are the Millennials Saving the Housing Market?
Right now, home prices are on a tear. Why is that? Well, because we’ve got so many people saying, “I want out of the apartment buildings. I want to get out to the suburbs.” With ultra-low interest rates right now, it’s allowing people to purchase homes at much lower monthly payments. It’s my belief that we’ll begin to see the individual housing market do exceptionally well and remain very strong for at least the next five to seven years with the millennials. I think this will happen as a result of the millennial generation buying houses and growing their families. With that said, the commercial real estate market doesn’t look so good. We’re going to dive into that here in just a minute.
A Quick Look at Unemployment and the Economy
Currently, unemployment is down to 10.2%. It looks like jobs are continuing to come back slowly. And it seems like the economy is doing a little bit better.
What’s Driving the Stock Market?
The way it’s running today, I don’t know that the economy tells the whole story behind why stocks are doing what they’re doing. If you missed the last Monthly Economic Update, you need to go back and give it a watch. Bud Kasper and I talked about the reasons that we think the markets are on a tear. Firstly, there really isn’t anywhere else to put money. And secondly, you don’t fight the Federal Reserve! The Fed has made it very clear that they’re here to be a backstop for the economy and to provide liquidity to any markets that may need them.
Figure 1 | Source: Chaikin Analytics
Let’s take a quick look at August in Figure 1. As of today, it’s August 26, 2020. Here’s where we’re at so far in the last month. The NASDAQ is at the top of the charts again – up 10.04%. It’s green across the board! The S&P 500 is up 5.8%, Dow Jones Industrial Average is up 6.45%, the S&P 100 is up 7.75%, and down at the bottom is the S&P MidCap at 2.57%.
Year to Date – Huge Spread Between Highs and Lows
Figure 2 | Source: Chaikin Analytics
Let’s back out from the monthly view, though, and take a look at a year to date view of this. We’re looking at things on a year-to-date basis in Figure 2. You can see in March there was the big COVID-19 sell-off. Then the NASDAQ recovered unbelievably. A 34.45% positive on the NASDAQ so far this year! The S&P 100 is up about 11.5%, and the S&P 500 is up 6.9%. The Russell 3000 is up 6.49%, and the Dow Jones Industrial Average is still in a little bit of negative territory with Russell 2000, SmallCap, and MidCap also in negative territory.
There’s about a 55% spread between the S&P SmallCap and the NASDAQ. That’s a huge, huge spread!
Technology is the Driving Force
We’re seeing money flow to technology stocks starting way back in April. Technology has been at the top of the heap. Anytime money continues to flow into one particular area of the market, it continues to push prices up. And that’s exactly what we see here.
We all know how important technology has become in this COVID-19 environment. So any company that’s doing something to make it easier for people to communicate and work from home, those stock prices soar. For example, Apple stock is absolutely on a tear this year and announced the four for one stock split. That’s going to make a big difference.
Sub-Sector Performance Year to Date
Figure 3 | Source: Chaikin Analytics
Look at that Homebuilder’s Index!
Let’s dive into the sub-sectors here in Figure 3, which looks at things on a year to date basis. The innovative technology ETF is up 46.32% so far this year. The NYSE technology ETF is at 44.96%, and Homebuilders is doing great – up 18.74% now.
Figure 4 | Source: Chaikin Analytics
In Figure 4, you can see pharmaceuticals, which you would think would be up, is still down 4% year to date. Transportation is down 7%, aerospace down 16%, with mining and insurance down too. The Dow Jones REIT index (commercial real estate) is negative 20.8%, while the Homebuilder’s index is up 15%. That’s a huge disparity! This is what I was referring to earlier with the millennials impacting the housing market. There’s a significant difference in what’s going on in residential real estate and what’s going on in commercial real estate. Make sure you read that article that Shane wrote on the real estate marketing during COVID-19 for more information.
What Sub-Sectors are Down Year to Date?
Figure 5 | Source: Chaikin Analytics
Looking at our worst performing sub-sectors in Figure 5, oil and gas equipment and oil and gas exploration are down 43.5% and almost 56%, respectively. Regional banks are down 32%. There’s still fear of defaults from COVID-19, the lack of the additional stimulus bill, and banks aren’t sure when businesses will be able to open back up fully or when the consumer will get back out there and continue to spend. All of this is putting pressure on regional banks, with insurance companies, the mining industry, and aerospace all struggling too.
As Bud and I talked last month, this is not a broad-based rally where we see the rising tide lifting all boats. There are sub-sectors of the market today that are still getting beat up and have lost a lot of money this year. So we’re keeping an eye on that. As I mentioned earlier, looking at the marketings in a broader sense, most of the money is flowing to technology.
The Presidential Election is Right Around the Corner
There’s a big event coming up in a couple of months, the presidential election. There are a lot of questions about how the outcome of the election will impact the markets. We have our theories about that, but I don’t want to make this a political discussion. The bottom line is I believe the markets would react favorably with a Trump victory, and the markets would throw a little bit of a temper tantrum early on with a Biden victory.
However, you can look back in the past and look at democratic presidents versus republican presidents; the markets really don’t care. What the markets truly care about is consumer spending. Why? Because consumer spending represents 70% of our total gross domestic product (GDP). That’s the key to continued market recovery and continued economic recovery, getting the American people back to work and spending. That’s the key getting us back to some normalcy.
The presidential election and the outcome of COVID-19 are the two most significant things that could negatively affect the market between now and the end of the year. We’ll continue to keep our eye on everything for you.
Stay in Touch with Us
As always, we encourage you to stay in touch with us. Make sure you’re talking to us about your portfolio’s makeup and looking at where you’re at on your overall financial plan.
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