Good Tuesday to you. The S&P 500 endured its 7th worst year ever in 2022 as markets fell from their 2021 euphoria. And yet, as rough as the year was, we've seen worse. Can you guess what the index's worst performance ever was? a. -35.3%, b. -43.8%, c. -60.1%. Follow the wave 🌊 below for the answer. Today's financial topics are: - Stocks Aren't Exactly Cheap
- A Credit Crunch on the Horizon
- Negotiate These Things When Buying a Home
| |
MARKET OUTLOOK Stocks Aren't Exactly Cheap Yet | | | | There's no perfect way to evaluate the market. Each indicator has its flaws and biases, and each stock, industry, and sector comes with its own asterisk to consider when weighing its valuation. Nonetheless, when a multitude of metrics seem to corroborate that the market might not be cheap, it might be worth giving that idea some thought. So… stocks aren't on sale? - Let's review: The stock market enjoyed a period of jubilance between March 2020 and December 2021. The Nasdaq index rose by 127% from its March trough to its December peak, and the S&P 500 climbed roughly 106%. During that time, stocks got really "expensive" relative to historic standards. Both market and economic conditions gave way to much speculation, and subsequently, massive run-ups in stock valuations.
- Current situation: 2022 brought a reality check as it brought the S&P its 7th worst year on record — a fall of 19.64% while the Nasdaq and Dow dropped -33.47% and -8.74% respectively. As a result, valuation multiples are down, but they're still considered high by many standards.
- Numbers to know: The S&P 500's forward P/E ratio stood at 21.6 at the onset of 2022, a number that now reads about 18.3, a 15.2% decline. Historically though, that's a bit high. Between 2014 and 2019, this metric averaged just 16.9. It also trades at 2.25 times expected sales, a lower number than the 2.85 it started out with last year, but above the 1.91 average it logged in the 5 years that ended 2019.
- Other considerations: The Schiller CAPE ratio, which is designed to paint a more accurate, cyclically-adjusted earnings picture relative to valuations, has been around 29 lately. This is much lower than the 38 it carried in Q4 2021, but still high. The Buffett Indicator, which shows that the total value of the stock market currently represents about 165% of total annualized GDP numbers, also indicates that the market is still significantly overvalued.
- And going forward: Markets have posted some apprehensive gains so far in 2023, showing signs of recovery from last year's blood bath. But heading into the second half of the year and beyond, the water has hardly ever been more muddy. We've got a confluence of both head and tailwinds to navigate, and how they influence stocks remains to be seen.
- What it means for us: For the long-term investor, market valuations shouldn't mean that much the majority of the time. They're something to keep an eye on to remain prudent and informed, but mainly the concern of short to mid-term traders.
Take this related lesson and earn 🟡 Dibs: | | | |
ECONOMY Credit Crunch on the Horizon | | | | The banking industry has been dealt a buffet of complexities to navigate all at once, and so far, the outcome has been less than pretty. All can be traced back to the pandemic and its many aftershocks — stimulus, 0% rates, leading to inflation, contraction, and historic rate hikes. So now, both banks and consumers find themselves in a bind. Banks have to be careful, and so do depositors. Two apprehensive parties that both need one another is an odd pairing, and one with uncertain results. An abundance of caution - The fallout: We've seen 4 relatively major U.S. banks fail in 2023, the most in a long while. As a result, circumspect clients and banks alike have come together to create a self-fulfilling prophecy of contagion, if you will.
- Concentration: These ailing institutions have served to further the momentum of a reality that was already creeping in — bigger banks. As banks fail, their depositors must go elsewhere, and there's some safety to be found in the idea of "too big to fail."
- Re-assessing risk: Banks were already becoming more cautious about extending loans. With the cost of everything having risen on common products like homes and cars, and hefty interest rates being slapped on those loans too, it's suddenly become even more risky to lend to the average consumer. Combine this with new threats of contagion, and you'll quickly have some stingy banks.
- Lending less: While it's not something being paraded obviously, it's assumed by now that most banks are tightening their lending standards as a result of this. Goldman Sachs economists estimate that roughly 40% of banks with a low ratio of FDIC-insured deposits will be handing out fewer loans this year, and smaller banks with more insured deposits will pull back by around 15%, creating a net 2.5% drag on total lending.
- Bracing for losses: Big banks recently reported their quarterly earnings, and a common theme throughout the filings was that banks are shoring up their provisions against loan losses. Capital One, for example, upped its provisions for credit card losses by 300% to $2.26B. What does this mean? Banks are expecting more defaults, and more loans to become sinking ships this year.
- Distressed loans: According to data compiled by Bloomberg, the share of loans that are considered "distressed", or trading at less than 80% of their face value, has spiked by about 26% to $127B in the last two months alone.
- The money supply: The contractionary monetary policy period is well underway in the wake of the Fed's historic rate hikes to curtail inflation, and the fallout can be seen in the money supply. U.S. M2 money supply has been falling for over 15 months now, and by February, it had dropped -2.2% relative to one year prior, the fastest decline since the 1930s. Why is that? When banks make loans, they create money. Slumping M2 isn't just a sign of the Fed reducing its balance sheet, but also of declining consumer activity.
What does all of this mean for us? It means that the times are unprecedented and tough for the average person. But, then again, when are times ever really that easy? Dealing with this on a personal level and in small, actionable ways is a prudent thing to do. In short — prioritize your credit score and eliminate debts, increase your savings rate, invest what you can for retirement, and add to your skillset to become as invaluable as possible. Take this related lesson and earn 🟡 Dibs: | | | |
HOUSING Negotiate These Things When Buying a Home | | | | Buying a home is an exciting and often nerve-wracking experience. Fortunately, with some careful consideration and a bit of strategy, you can navigate this process with ease and come out on top. Key points to be prepared for during the negotiation - Price: This one might seem obvious, but it's worth stating. The median sale price of homes across the U.S. dropped by almost 9% in Q1 2023, meaning the winds are shifting back in favor of buyers. Knowing this, it means that negotiating the price is more of an option now than it has been for the last 3 years. Be sure to do your research and come armed with data on comparable homes in the area so you can make a compelling case for your offer.
- Mortgage rates: Not getting multiple quotes on your mortgage can cost you a lot of money over the long term. And yet, according to a survey from Zillow, about 72% of prospective home buyers haven't shopped around. And according to Freddie Mac? Borrowers who applied to two different lenders reduced their mortgage rate by an average of 0.10%. Over the life of a typical 30-year fixed loan on a median-priced home, that could mean savings of up to $79,000 in interest over the life of the loan.
- Skip the fees: Mortgage rates are up significantly, and overall mortgage volume is subsequently down. As a result, lenders are vying to be more competitive and may be willing to waive some common mortgage fees if you ask — things like origination, underwriting, and loan application fees. Mortgage fees can make up around 1% to 2% of the total loan amount, so dodging them could save you a pretty penny.
Take this related lesson and earn 🟡 Dibs: | | | |
🌊 BY THE WAY | - 💹 Answer: -43.8%. The market endured its worst losses ever back in 1931, during the great depression. Ultimately, this can serve as a source of some perspective on our current bear market (A Wealth of Common Sense)
- 💲 Inflation is hanging around — why it's so tough to beat (Axios)
- 🤝 ICYMI. Getting a loan just keeps getting harder (Finny)
- 🤖 The average federal refund is down 8% in 2023, presenting a potential headwind to spending (IRS)
- 🤑 Finny lesson of the day. It's tougher than ever to be a prospective home buyer — soak in some power tips before diving into the market:
| | | |
| |
| Finny is a financial wellness platform. The Gist is Finny's twice-a-week (Tues & Thurs) newsletter covering personal finance, market trends and investing insights. Finny does not offer investment and stock advice. If you have any feedback about this edition or anything else, please email us. | | | | | | | |
No comments:
Post a Comment