European Stock Markets Set the Tone as Investors Appear to Shrug Off Pandemic Restrictions

Equity index futures appear to shrug off new pandemic restrictions. Markets prepare for a short week of trading. Investors waiting for Fed chair announcement. Atlanta Fed President Bostic says Fed may need to taper faster. Tesla looks to sell Model S Plaid in China by Spring. Tax-loss harvesting and potential tax changes could lead to market volatility. Existing home sales will be reported after the open.

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5 min read
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Key Takeaways

  • Stock Index Futures Appear to be Shrugging Off New Pandemic Restrictions in Europe

  • Tax Considerations Could Result in Market Volatility 

  • Housing Reports Causing Confidence and Concern in Real Estate Markets

(Monday Market Open) Stocks appear to be shrugging off increased pandemic restrictions in Europe because the equity index futures are pointing to higher open sparked by the positive tone set in European markets. It appears to be a positive tone on a holiday week. As usual, the market will be closed on Thursday for the Thanksgiving holiday and then open for a half day on Friday. This commonly results in lighter volume throughout the week so investors should be careful trading and consider smaller position sizes.

This morning President Biden renominated Fed Chair Jerome Powell to maintain his position at the Federal Reserve. While a few Democrats have already spoke out against the nomination, it’s likely that Powell will see bi-partisan support because of Powell’s Republican background.

Speaking of the Fed, Atlanta Fed President Raphael Bostic said in a speech last week that the Fed may need to taper faster. The comments appear be strengthening the dollar. A quicker taper could result in an interest rate hike sooner than expected.

EV makers continue to make news. Tesla (TSLA) was up 2.4% in premarket trading after CEO Elon Musk tweeted about the possibility of the Model S Plaid being available to customers in China this spring. Tesla has boasted that the luxury model is the fastest production car they have ever built but hasn’t been available for customers in China. Competitors Rivian (RIVN) and Lucid (LCID) were down 5% and 3% respectively before the bell.

Activision Blizzard (ATVI) is down 1.23% in premarket trading on news that the CEO Bobby Kotick would consider leaving the company if he can’t fix corporate culture issues. Last week, The Wall Street Journal reported that Kotick didn’t inform the board’s directors about misconduct reports that included one rape accusation.

Potential Tax Troubles

This year’s stock market losers could see additional volatility because it’s tax-loss harvesting season. This is the time when many investors choose to sell their losers to recognize the loss for tax purposes and then, if they so choose, they can buy the stocks back 30 days later. The losses have the potential to offset some capital gains taxes, up to $3,000, and potentially reduce a person’s tax burden. Of course, TD Ameritrade does not provide tax advice, but, if you think this is a strategy you’d like to consider learning more about, talk to your tax advisor to determine if tax-loss harvesting would work for you and your portfolio. 

One other potential volatility contributor is that many folks may want to take profits where they can as we go into year end. The reason why is because of potential changes in tax laws. Some investors may want to sell their investment at the current known tax rate in order to avoid any unknown tax rates going forward.

Housing Hope or Hysteria?

After the open, the existing home sales report will be released, and later this week, the new home sales report comes out. Last week, we saw building permit rise, but housing starts came in lower than expected. However, the housing market continues to rise. The average home sale price rose 13.9% from September 2020 to September 2021, while the average monthly rents rose 10.7%. Despite rising home prices across the United States, weakness in certain areas have caused Zillow (Z) to try and sell much of its house flipping inventory to private equity funds.

Last week, real estate platform and brokerage Redfin (RDFN) reported that a record 18% of homes bought in the United States were purchased by investors in the third quarter. Investors spent $64 billion worth on homes, three-quarters of which were single-family homes, creating an all-time high.

Atlanta, Charlotte, Miami, Phoenix, and Jacksonville have the highest share of investor ownership, which suggests investors appear to be willing to take on more risk because 65% of these homes are in areas with a high-heat risk and 64% had high-storm risk. This development has many real-estate analysts worried that housing is becoming a speculative bubble. Yale Economics Professor Robert Shiller said on CNBC that home prices have never been so high when adjusting for inflation.

According to a report by Clever Real Estate, a less speculative market is commonly built on typical homebuyers who will try to keep the price-to-income ratio around 2.6. The report used Pittsburgh, Cleveland, Oklahoma City, St. Louis, Cincinnati, and Birmingham as examples of housing markets with “normal” price-to-income ratios. However, San Jose, San Francisco, San Diego, New York, and Los Angeles have ratios as high as 9.8. Across the United States, a typical American needs an income of $144,192 to purchase an average home. Unfortunately, the average income is $69,178.

Despite the concerns, Redfin is forecasting a more balanced housing market in 2022. It believes that mortgage rates won’t rise as fast as they did in 2021, and inventories will increase to a new 10-year high. They also expect rents to continue to rise by 7%.  

Real Estate Segments

CHART OF THE DAY: GETTING REAL. The PHLX Housing Sector Index (HGX—candlesticks) has recently begun to underperform the S&P Homebuilders Select Industry Index ($SPSIHO). The S&P Real Estate Select Sector Index ($IXRE—blue) started underperforming the other two indices in March but has outperformed the HGX since June. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results. 

Neighborhoods: The PHLX Housing Sector Index (HGX) attempts to track companies whose primate lines of business are directly associated with housing construction in the United States. However, the S&P Homebuilders Select Industry Index ($SPSIHO) has outperformed the HGX because of the high demand for new houses. This could be a function of homebuilders’ ability to pass on higher costs to consumers versus the more peripheral housing companies.

Real Estate Investment Trusts (REITs) don’t always react the same to housing market changes because many of them rely more on their existing assets to produce returns instead of new construction. The S&P Real Estate Select Sector Index ($IXRE) attempts to track the performance of REITs. Because REITs tend to pay higher dividends than most stocks, they tend to compete for income investors instead of growth investors that the homebuilders might attract. However, rising interest rates are likely to be a drag on all these groups because of rising costs and competition from higher-yield bonds.

Pre-Fab Grab: According to The Wall Street Journal, the rising cost of housing could be an opening for manufactured housing. The cost to build a new single-family home in 2020 was about $309,900, not including the land. However, the cost of a new manufactured home is $87,000, not including the land. After years of struggling, the manufactured home industry is now on pace to deliver more than 100,000 homes this year, which hasn’t happened since 2006.

Cavco Industries (CVCO) and Skyline Champion (SKY) are among the leading builders of manufactured and modular homes. Both companies announced better-than-expected earnings at the beginning of November. However, when it comes to moving and relocating a fabricated home, buyers may turn to McGrath RentCorp (MGRC), which rents and sells relocatable modular buildings. However, prefabricated and manufactured homes still have a negative reputation among many homebuyers that can be difficult to overcome.

Workampers: In 2020, the Golden Globe-nominated movie “Nomadland” focused on a group of seasonal workers and RVers who travel around looking for jobs. Amazon (AMZN) has tried to tap into this group. In 2008, Amazon launched CamperForce, which recruits RVers and vandwellers to work for them during peak holiday shopping seasons. Of course, nomad workers aren’t a new concept; Workamping has been around for a long time and has its own community.

Living in RVs has become more and more popular with the FIRE (Financial Independence, Retire Early) movement, minimalists’ movement, and social media influencers. So, while it’s unlikely to see large groups of Americans become nomads, it’s possible to see more and more choosing to move into RVs. Additionally, if basic materials continue to climb and drilling and mining increase, RV boomtowns could appear in small rural areas where this kind of work takes place.

These factors could be good for RV manufacturers that already benefited from people going outdoors during the pandemic. Thor Industries (THO), which announces earnings next week, LCI Industries (LCII), which beat earnings estimates at the first of the month, Winnebago (WGO), and Rev Group (REVG), both of which announce earnings next month, are all among the largest RV manufacturers in the United States. These stocks performed well during the pandemic as many people went outdoors rather than being couped up. They could also be beneficiaries of an expensive housing market.

Good Trading, 

JJ

@TDAJJKinahan

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Key Takeaways

  • Stock Index Futures Appear to be Shrugging Off New Pandemic Restrictions in Europe

  • Tax Considerations Could Result in Market Volatility 

  • Housing Reports Causing Confidence and Concern in Real Estate Markets

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