Zacks Investment Management

In this week’s Steady Investor, we look at the biggest news stories and key factors that we believe are currently impacting the market such as:

• The slump in U.S. home sales
• Interest rate risk looms
• U.S. job numbers are strong, but low

U.S. Home Sales are in a Slump – A majority of U.S. home sales are existing homes. But with 30-year fixed mortgage rates pushing past 7%, existing homeowners are staying put – resulting in anemic inventories and also weak home sales. July marked the fourth time in five months that existing home sales have declined, falling 2.2% from June to a seasonally-adjusted rate of 4.07 million. And it marked the weakest July for sales in over 10 years. Year-over-year, sales were down -16.6%. Bad news for existing home sales has been good news for homebuilders, however, as the market has shifted towards demand for new homes. According to the U.S. Commerce Department, 714,000 new homes were sold in July, which is up from 543,000 last July and also marked a step up from June’s 684,000 annual rate. The market is responding to supply and demand forces, but how long the demand-side of the equation keeps up is an open question. Home prices are still near record highs, and with 30-year fixed mortgages shooting past 7% with no indication of coming down anytime soon, some would-be homebuyers are dropping out of the market.¹

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Real Yields are Up, But Interest Rate Risk Looms – When an investor earns a risk-free return on U.S. Treasuries, it’s important to consider the purchasing power of those earned dollars. In other words, when deciding whether to purchase a bond, investors should consider the yield on the bond minus the inflation rate. That’s known as the ‘real yield.’ For several years following the 2008 Global Financial Crisis, real yields were paltry as both interest rates and inflation hovered near record lows. For a period following the pandemic, real yields turned negative – meaning investors lost purchasing power in bonds. The setup looks different today. With the Federal Reserve ending quantitative easing and hiking interest rates quickly last year – and with inflation falling markedly from highs – real yields have turned positive in the last year. As seen in the chart below real yields have climbed to 2%, which is good news for savers.³

Higher and rising real yields aren’t great across the board, however. Higher real yields can indicate borrowing is becoming more expensive in the economy, which can choke off activity and thusly affect growth. Corporations may be less willing to finance new growth and investment. Second, for equity investors, higher real yields mean that a higher discount rate gets applied to future cash flows, which can make some stocks look less attractive from a valuation perspective.

U.S. Jobs Numbers Revised Lower, But Still Strong – The Labor Department has revised job growth figures from the first quarter, and it turns out that hiring was a bit softer than previously reported. The revised figures showed that the U.S. economy added 306,000 more than previously thought, which may sound like a high figure but represents 0.2% of all jobs for the twelve months through March 2023. This revision brings the average number of jobs created per month to 312,000, which is only slightly lower than the 337,000 previously reported and still marks a robust pace of hiring, above pre-pandemic levels. In a related story, Gallup recently conducted a survey about the labor market focused on engagement, and the findings support a rethinking of the value of remote work. According to the survey, the percentage of fully remote workers who feel a sense of connection to the purpose of the organization fell from 32% to 28%, which contrasts to the 33% of fully-time office workers who report a sense of connection. Hybrid workers reported the strongest connection of all, with 35% saying their company’s mission made them feel a sense of purpose in their jobs.⁵

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