August 20th, 2022 | Apple Products, Home Buying, Gen Z, Reduction Act, China, Inventory and Sales, Emerging Market, Housing & Saving Rates Due to Covid...

Apple Products
In the past we have posted about where will Apple find the next area of growth for their business. One area of growth for them could be the $452 billion mobile ad market which could grow to $680 billion in 2026. They also may take advantage of trying to get into the online advertising market which is about $600 billion. There are many different ways that Apple may end up putting advertising on your phone and through your apps. It will be interesting to see how they handle this over the next few years and how consumers accept more advertising on their phone.

Home Buying
The affordability index of homes in the US has fallen to 98.3 which is the worst since June 1989. With rising mortgage rates and the sale prices of homes not dropping yet, home buyers just cannot afford to buy a home. If you’re already in a home, you do have the appreciation to use for a down payment on a new home, but if you’re trying to get into your first dream home that is getting farther and farther away for first time home buyers. Not only are the payments harder to qualify for, but the 20% down payment on a home of is also much harder to achieve. If you look at a $400,000 home the 20% down payment would only be $80,000 versus a home of $600,000 that would require a down payment of $120,000. That's a 50% increase. This is also preventing homeowners from moving up to another level if they cannot sell their existing home to first time buyers.

Gen Z
Generation Z, who are ages 18 to 24, have been an active generation of investors with half of them investing and 26% buying stocks. They have really only experienced the decline from Covid and feel stocks always rebound quickly. This year they are learning a new lesson and a bank rate survey found that 73% of Gen Z traded actively this year compared with Gen Xers, who are 42 to 57, just 28% traded. With baby boomers only 25% traded. I think the problem could be is where Gen Z gets their information. Half of them learned investing on YouTube and watch other exciting videos and 1/3 receive their education on TikTok. In my opinion those are probably not the best sources. At their age and their experience level, they expect quick rewards as opposed to having long-term patience.

Reduction Act
There's a lot to the Inflation Reduction Act that I don't like, but I think the thing that bothers me most is the name of the bill. Why don't we just call it what it is.... it's predominately a climate bill and has very little to do with inflation. I will say one of the benefits in the bill is that Medicare will be able to negotiate drug prices. Far too often I believe the government just has to pay top dollar for products and services, which makes little sense to me. The downsides are plentiful, but some of the main areas of concern include how we will be paying for this bill. The first that comes to mind is the 1% tax on stock buybacks. This creates value for shareholders and shareholders already pay capital gains tax when money is made after selling an investment. This is essentially a penalty for companies rewarding shareholders and it will be interesting to see how this impacts buyback behavior. The 15% alternative minimum tax is far too complicated for the average person to understand, and I will continue to monitor how this will ultimately impact businesses and their investment decisions. Most of the investments as I mentioned go to climate policy with $369 B out of the $437 B in investments going towards "energy security and climate change". This includes a bunch of fluff including something as silly as $27 billion for a national climate bank and $3 billion for so-called "climate justice".

China
China is having economic problems which is starting to show up in their top 100 property developers as of July. Sales for these top developers saw a decline of 39.7% in the month of July. This could be the start of some more issues for China!

Inventory and Sales
While the retail sales number for July today showed no gain compared to June, the year-over-year gain of 10.3% shows me the consumer is still willing and able to spend money. The only two areas that showed a decline compared to July 2021 were electronics and appliance stores which were down 9.9% and department stores which were down 1.4%. I believe the decline in electronics and appliance stores can be largely attributed to the demand pull forward we saw during covid and for department stores it could be due to discounted inventory. This was apparent in Target's report where they missed consumer demand and had to severely discount excess inventory. Although gas station sales fell 1.8% compared to the month of June as fuel prices declined, compared to July 2021 gas station sales were still 39.9% higher as fuel prices still remain elevated. Food services and drinking places still remained a popular area for consumers as sales were up 11.6% compared to last year. Overall, the consumer still looks to be in a good position as we enter the back part of 2022.

Emerging Market
The US markets have recovered somewhat, however; I am not convinced it will last for the growth stocks. If you’re thinking it may be a good time to look at the emerging market stocks, they have been struggling as well. Over the past five months there has been $39 billion in outflows from emerging market stocks. That is the longest losing streak going back to 2005 when records begin.

Housing
With both mortgage rates and housing prices remaining elevated, demand has definitely pulled back in the housing market. In July, Existing home sales which look at closed contracts (likely signed in May and June) were down 6% compared to the month of June. Looking back to July of last year, existing home sales fell 20% to a seasonally adjusted annualized rate of 4.81 million units. If you exclude the craziness of Covid, this was the slowest rate since November 2015. The problem is supply remains extremely tight and there were just 1.31 million homes for sale at the end of July, which would generate a 3.3-month supply based on the current sales pace. Generally, 5-6 months is considered a healthy market. One of the major problems is first-time buyers are not playing an active role as they accounted for just 29% of buyers in the month of July. This compares to a historical level of around 40%. Much of this likely has to do with affordability. High rates and economic uncertainty have also led to an increased level of cancellations. In July, 17.6% of builder contracts fell through, compared with 8% in April and 7.5% in July 2021. For existing home sales about 63,000 of those agreements fell through in July, or about 16% of homes that went under contract that month, according to Redfin. Cancellations were 12.5% in July 2021. This indicates to me that either mortgage rates or housing prices have to give to create a stronger demand environment.

Saving Rates Due to Covid
The savings rate surpassed 30% when Covid hit because people had nowhere to spend the money they were receiving. It has dwindled back down to a normal savings rate of around 6%. The banks have not raised their rates on savings much and it may be a while before they do. You may think because the federal funds rate is increasing, banks must increase their savings rate. That is not correct. The reason the bank raises their rates is to attract more money. Well, the banks still have plenty of cash on their balance sheets so there’s no incentive for them to raise their rates. Banks are in the business of lending money, and they earn their money off the spread of what they pay for money and what they loan money at. I would not expect to see this change anytime soon but this is going to help the banks with some good profits over the next few quarters.

 

Harrison Johnson, CFP®: "Moving Out of State in Retirement"