Market Pulse: Housing, Market Drawdowns, and Q1 Earnings Season Recap

Housing:

It has been little over two years since the Fed embarked on one of the more aggressive interest rate hikes in decades to curb inflation. At the same time, housing market continues to show resiliency.  

Strong demographical tailwind as Millennials entered peak home-buying age, stricter underwriting standards post 2008, and strong economy are one some of the main attributes propping up the housing market. Furthermore, existing homeowners continue to reap benefits of the zero-interest rate era – few charts from Appollo highlighting the unique setup:

About half of all outstanding mortgages have an interest rate below 4%. In this environment, below 4% rates is a significant asset and without a major life event, such as layoff, divorce, etc., people will be reluctant to sell.

Furthermore, nearly 40% of US homes don’t have a mortgage.

Overall, combination of these factors created strong underpinning for the housing market as both foreclosures and bankruptcies remain below pre-Covid trend despite significantly higher interest rates.

Market Drawdowns:

We share following chart often to highlight that volatility is a normal feature of the market and price drawdowns larger than 10% are more common than people think:

The following chart from Jurrien Timmer at Fidelity, adds another perspective on drawdowns and volatility showing that markets spend more than half of time in drawdowns of 5% or more. As uncomfortable as they are, market drawdowns are standard feature of the market.

Q1 Earnings Recap:

With close to 92% of the S&P 500 companies reporting their first quarter numbers, the earnings season is nearly over and the year-over-year growth is expected to be ~7.4%, which is better than initial estimates. High nominal economic growth combined with improving margins has been feeding into corporate earnings. In general:

Furthermore, out of 90% of companies that have reported their earnings to date, 77% delivered better than expected numbers, which is above the long-term average of 67%.

Over the long-term, fundamentals, such as earnings growth, play an important role in driving market returns. If earnings growth continues at the pace currently projected, it can ease up market valuations without the need for major decline and create a more supportive environment for future returns.