Equities continue to ignore any bad news out there, including the Donald Trump administration’s contemplation of unveiling a range of sanctions on China as punishment for the crackdown in Hong Kong, not to mention the heightened tensions between India and China as the former has mobilized troops along its northern border.
If today’s news flow isn’t about vaccines or reopenings, investors could care less. There is not a day where the markets fail to vigorously respond to any vaccine/treatment news, almost like how they responded last year to the multiple utterances from Trump on the “Phase One” trade deal with China.
The latest is from Merck & Co. Inc., which stated it has bought the rights to develop a potential drug that has “potent antiviral properties against multiple coronavirus strains,” adding that it is also starting work on vaccine candidates. We are now up to at least 10 coronavirus vaccines under development and investors are pricing in just one coming to market, and that it will be timely, effective and allow for a complete return to normality (pipe dream).
Nobody ever seems to notice that the long bond has generated a 25-per-cent total return in 2020. We’ll keep that our little secret
Be that as it may, bond investors retain a hefty dose of skepticism over the V-shaped recovery view embraced by the stock market. As everyone celebrates the Nasdaq’s 4.9 per cent year-to-date uptick and that the S&P500 is “only” down 6.1 per cent, nobody ever seems to notice that the long bond has generated a 25-per-cent total return in 2020. We’ll keep that our little secret.
In any event, it’s all about bear market math. An example of what passes for “good news” today: Data from OpenTable, an online restaurant-reservation service, show that its booking gauge has improved this past week. Well, no kidding, the restrictions have been lifted. The fact that bookings are still down 87 per cent from where they were a year ago, well, that receives very little mention.
There is one area of the U.S. economy that appears to be emerging relatively unscathed and it is housing, especially single-family with backyards and in the suburbs — a pattern we can expect to see post-pandemic. Lumber prices see the opportunity here as they have been bid up 45 per cent from their lows nearly two months ago (and up nearly 10 per cent year over year).
In addition to single-family housing, apartment real estate investment trusts with high-quality tenants have also hung in quite well. The seven largest REITs that specialize in mostly high-end apartments each collected at least 94 per cent of their total rent payments in April.
And there is a budding bull market out there for the “do-it-yourself” crowd coming out of this crisis. We have all learnt to become more self-reliant, that is for sure, which has benefited home improvement, gardening supplies, exercise equipment, cooking appliances (breadmakers!) and auto parts in the do-it-yourself section.
So there was jubilation Tuesday over the U.S. new home sales data for April. The consensus was looking for a 480,000 annualized unit figure, but instead we got 623,000, which represented a 0.7 per cent increase over March (revised down to 619,000 from 627,000).
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As usual, the devil is in the details.
At 623,000, new home sales were still at their second-lowest level since December 2018. The 0.7 per cent bump in April followed a 13.7 per cent plunge in March and a 7.4 per cent slide in February. Barely more than 1/50th of that February-March collapse was recouped in April. That’s the way I look at the situation.
Let’s dig a little deeper. We see that all the buying and then some was done on “spec” or on “plan.” Sales of units not even started soared 26.5 per cent. Meanwhile, sales of units currently under construction dipped 0.5 per cent and this followed a huge 9.8 per cent plunge in March and an even sharper 12.1 per cent setback in February. The real kicker was what happened to sales of finished homes readily available: they slid 13.6 per cent in April, on top of a 9.4 per cent decline in March, to 216,000 annualized units, the lowest they have been since October 2018.
One thing seems sure, we have quickly morphed from a sellers’ market to a buyers’ market, as the unsold inventory backlog has moved from five months of supply in January, to 5.5 months in February, to 6.4 months in March and 6.3 months in April. Anything above six months is considered a buyers’ market.
Like new home sales, there was a hubbub about consumer confidence (Conference Board version) improving in May to 86.6 from 85.7 in April, as that prior month’s headline was revised down to 85.7 from 86.9. The consensus was 87, so there is no getting around the fact that this was actually a smidgen below what the street had been expecting. The 86.6 reading was the second-weakest print since June 2014.
Six of the nine major regions saw consumer confidence falter last month. Perhaps to nobody’s surprise, it was the 35-and-under age group that suffered the most. From an income standpoint, it was “no problem” for upper-income folks as those who clear more than US$125,000 per year posted a hefty rise in confidence, to 96.4 from 89.9 in April. No such luck for those in the $25,000-$35,000 bracket as their confidence level receded sharply to 71.8, the lowest in more than five years, from 82.5. There is a huge divergence between hope and reality in this report.
The reality of the current situation was evident in the appraisal of the present situation. Only 16.3 per cent of consumers view business conditions as good, down from 19.9 per cent in April and 39.2 per cent in March. This is a seven-year low, and right in line with what we saw in March 2008 when the prior recession was in its infancy stage. The share saying things are simply bad has shot up to a 37-year high of 52.1 per cent in May from 45.3 per cent in April and from 11.7 per cent in March. A record-low 31.6 per cent considered the current situation to be normal. It’s amazing it wasn’t zero give that at the best of times this number is little better than 60 per cent.
David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. You can sign up for a free, one-month trial on his website.