Stocks tacked on a third consecutive week of gains and hit new highs on Thursday as the buy-the-dip mantra has returned following September’s over 5% pullback. Further underpinning the bounce has been lingering tailwinds from monetary stimulus, better than expected Q3 earnings, corporate buybacks, and strong consumer balance sheets. However, inflation continues to loom and recent data, known as breakeven rates, indicated the highest inflation expectations in a decade with the 5 and 10-year gauges showing 2.8% and 2.6% (per Federal Reserve Bank of St. Louis data). Energy prices continue to add upward pressure and immediate relief is unlikely as OPEC has shown no inclination to accelerate production and US oil fields are on pace for the lowest annual capital investment since 2004 (per Evercore ISI). Despite the recent strength in stocks, the bond market seems to be more leery of inflation and interest rates continue to rise with the 10-year US Treasury yield flirting with 1.7% and approaching March’s 2021 highs. Next week, the Fed’s preferred gauge of inflation, personal consumption expenditures (PCE), will be released for September and it will be very interesting to see if stocks can maintain this recent strength should either year-over-year PCE growth come in above expectations or the yield on the 10-year US Treasury breaks out to new highs for the year.
Low housing inventory levels have been a boon to home prices, as the Case-Shiller price index is expected to show 20% year-over-year growth next week, but it also appears as though tight housing inventory is impacting the single-family rental market. According to research firm CoreLogic, single-family rents rose nationally 9.3% in August from a year prior, more than four times the pace a year ago (2.2% in August 2020). In addition, the gains were very broad as all price tiers rose, and for the first time since the pandemic, all 20 of the metropolitan areas CoreLogic covers saw positive rent growth. Miami was particularly strong, rising 21%, while Boston posted its first positive rent growth (+1.5%) since May 2020 (see chart below). Ultimately, strong job and wage growth, coupled with limited housing inventory levels and a continued desire for space is fueling a rebound for single-family rentals. Perhaps affordability issues eventually put a ceiling on the recent rental growth, but we expect increased migration to less expensive and more rural areas to persist. The scope of inflation is undoubtedly widening, and how the Federal Reserve addresses it after its November 2-3 policy meeting will be very important for investors.
Ian Browning, CFA | Director, Investment Strategies & Shareholder
Peter E. Simmons, JD | President & CEO