Posted by Scott Brown, CMT, Technical Market Strategist
Friday, June 17, 2022
Undoubtedly the most important story of the past week is the historic move in interest rates. While this is a trend that has been firmly in place for months, it has accelerated even more following last Friday’s higher than expected CPI report. That report prompted the Federal Reserve to hike interest rates by 75 basis points for the first time since 1994 on Wednesday and sent the 2-year yield to its highest level since 2007. Moves on the long-end of the curve have been only slightly less extreme, with the 10-year yield hitting its highest level since 2011 and the 30-year yield briefly tagging 2014 levels.
Today, we want to highlight one of the most prominent groups that higher interest rates put pressure on: homebuilders. As shown in the LPL Chart of the Day, the S&P 500 Homebuilding Index has crashed through a major support level this week and extended its losses from the December highs to more than 40%.
“Expecting homebuilders to underperform amid skyrocketing interest rates isn’t exactly a bold call,” said LPL Financial Technical Market Strategist Scott Brown. “But our takeaway from the recent breakdown is that there is little reason to think this trade is over or the trend is on the verge of reversing.”
To put some numbers to just how dramatic the interest rate move is to potential home affordability, consider this scenario. Someone looking to purchase a $300,000 home, with a 20% down payment and a 30-year fixed rate mortage (using the Bankrate.com National Average) would have faced a monthly payment of $1,047 at the end of last year when the average fixed rate 30 year mortgage was 3.27%. Cut to today, and the 5.91% mortgage rate would increase that monthly payment by 36% to $1,425, and that doesn’t even begin to factor in the other inflationary forces that consumers are battling right now. From a purely technical standpoint, we see little evidence that interest rate moves are done, and would continue to expect homebuilders to underperform the broad market, and potentially work lower in absolute terms as well.
LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) remains firmly negative on the Consumer Discretionary sector where homebuilding stocks are categorized. However, weakness is certainly not limited to the homebuilers, as more than 90% of stocks in the sector are below their respective 200-day moving averages and the sector is the worst-performing year-to-date with a more than 30% loss. We will need to see considerable technical improvement from the current situation before we can recommend a change to current positioning.
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All index and market data from FactSet and MarketWatch.
This Research material was prepared by LPL Financial, LLC.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
- Not Insured by FDIC/NCUA or Any Other Government Agency
- Not Bank/Credit Union Guaranteed
- Not Bank/Credit Union Deposits or Obligations
- May Lose Value