Our outlook on gold, Treasuries, inflation, interest rates, mortgages--and where to find your next stock buy.
The 10-year Treasury bond yield, at 4.35%, is down about 35 basis points from late April highs as rate hike fears subside. This coincides with the rebound in equity markets, as lower rates boost the present value of future earnings via a lower discount rate. Companies with the highest growth prospects benefit most from lower rates.
Investors cheered April’s CPI data, which came in slightly below estimates, while shrugging off the PPI data that came in above expectations. Used vehicle prices continue to fall as new vehicle inventory improves from pandemic supply shortages. Gasoline and housing prices put upward pressure on inflation. Higher home prices and interest rates continue to drive up shelter costs. Homeowners are staying in their homes longer, unwilling to give up their low mortgage rates. First-time homebuyers are finding it difficult to find starter homes as homeowners are staying put and higher interest rates are impacting affordability.
According to the CME Group FedWatch tool, which estimates the likelihood that the Fed will change the Federal target rate, investors expect multiple rate cuts before year end. Investors do not expect a rate cut at the upcoming June 12 FOMC meeting, but at the July 31 meeting, there is nearly a 1/3 chance of a cut. Recent commentary from Jerome Powell in Amsterdam indicated that because disinflation has slowed considerably this year the Fed needs to rethink its policy direction. He does not expect the Fed to raise rates but to hold them steady longer than they previously expected. The Bank of England and the European Central Bank appear to be in a similar situation. Both have recently held rates steady and indicated they expect rates to decline in the coming months.
30-year mortgage rates tend to be most impacted by the change in 10-year Treasury yields. Due to homeowners moving or refinancing, the average life of a 30-year mortgage averages closer to 10 years. The 30-year, fixed-rate mortgage has also declined since late April, and further decreases would be welcomed by would-be buyers. Home prices have remained high due to limited inventory. Homeowners are reluctant to give up their low-interest rate mortgages, and homebuilders cannot satisfy demand. The First-time Home Buyer Affordability Index provided by the National Association of Realtors details how much the market has changed in just a few years. In 2021, The average starter home price was $303,500, mortgaged at an effective interest rate of 3.26%, resulting in a monthly payment of $1,190. In 2024, the average starter home price is $331,000, mortgaged at 7.08%, with a monthly payment of $2,000. The median income of $65k for first-time homebuyers in 2024 is 18% higher than in 2021, yet monthly mortgage payments are up 70%. Falling interest rates would make refinancing an attractive option for recent mortgagors, boosting consumer spending power and home affordability.
Gold has been a strong performer in 2024, up nearly 14%. Geopolitical concerns have contributed to its strength as investors seek a safe haven. Bitcoin may be another area investors consider as geopolitical events develop. The alternative asset is up nearly 40% year-to-date to $61,000. Retail investors' enthusiasm for stocks is making a comeback. AMC Entertainment and GameStop experienced volatility similar to the pandemic-era madness. AMC used the opportunity to raise equity capital desperately needed to pay down pre-pandemic debt. The company took on significant debt to make several acquisitions prior to the economic impacts of the COVID-19 pandemic. Anticipation of falling interest rates and continued economic growth appears to be encouraging speculators off the sidelines.
Small and medium-sized companies continue to trade at a discount to their historical averages and well below large companies. Stock pickers can still find bargains looking beyond the largest top 10 companies. The challenge with investing is the past is history. We must navigate the unknown future. Buying solid companies at fair valuations remains the best way to make money reliably over time.
The solid companies profiled in this month's Investor Advisory Service are both midsized companies. Growth companies with annual revenues below $10 billion often have the optimal mix of risk and return that long-term stock investors find most attractive. The first pick in the issue is a leader in the apparel business with superior margins and an ultra-loyal customer base. Our second selection is a software company focusing on customer support solutions for some of the largest enterprises in the world.
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The commentary is excerpted from the issue of the Investor Advisory Service newsletter published at the end of May. To receive commentary like this in a more timely matter and receive actionable stock ideas each and every month, subscribe today. The Investor Advisory Service stock newsletter was named to the Hulbert Investment Newsletter Honor Roll for the 14th consecutive year for outperforming every up and down market cycle since 2007
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