Falling Yields Fuel Housing Market Demand

U.S. stocks sold off at the end of an otherwise quiet trading session. Markets remained muted ahead of the Jackson Hole symposium later this week, where Fed officials will deliver speeches on monetary policy. Between tomorrow’s publication of the last Fed meeting minutes and Friday’s speeches, traders seem to be cautious about placing bets.

Bond prices edged higher in the shadow of a nervous stock market, with yields on the 10-year note falling by 0.5% in just the past two weeks. This dynamic has one group of companies, and their stock shares, thinking optimistically about the months ahead. Homebuilders, tracked by ticker symbol SPDR S&P Homebuilders ETF (XHB), have applied for an increased number of building permits as mortgage rates have followed the 10-year note lower. 

The recent acceleration of this dynamic is by no means the first sign of this movement, but considering the time of year, with homebuyers scrambling to make housing decisions, this is a trend that may extend. The chart below displays how the trend in homebuilder stocks has clearly been upward during a downward move in interest rates. The inverse correlation implies that, as one of these trends continues, the other one is likely to continue as well.

Back-to-school sales at stores mean investors begin thinking about the retail season and positioning themselves to benefit from consumer spending habits around the end of the year. Any investor thinking about investing in retail shopping is largely consumed with thoughts about Amazon.com, Inc. (AMZN). Can anyone in the retail sector compete successfully against the online retail giant? Apparently investors think that some can. 

Since the beginning of summer, Amazon shares have failed to perform as well as some notable competitors. As the chart below shows, Target Corporation (TGT), Walmart Inc. (WMT), Costco Corporation (COST), and The Home Depot, Inc. (HD) are leading the consumer discretionary sector, tracked by the Consumer Discretionary Select Sector SPDR Fund (XLY), through this time period, while Amazon lags. Investors may be tipping their hand to identify that they favor these companies (all of whom have made strides in competing online) over the online behemoth.

Investors expect small-cap stocks to grow faster than large-cap stocks. When they don’t, some analysts like to point it out as evidence of a recession. However, many periods of the past have featured periods of large-cap leadership without signalling impending recession. That doesn’t stop investors for looking for moments when high-growth stocks may be timely for a relatively lower-cost entry point. Such investors will want to take note that mid-cap, small-cap and micro-cap stocks are continuing to perform poorly by comparison to large cap stocks (see chart below). The timing for purchase may be best delayed for now.

Tuesday’s session was marked by quiet, range-bound trading until a sell-off sent markets notably lower for the day. Bond yields also fell, propping up expectations for homebuilder stocks. Investors in the retail sector are betting on some of the more well established brick-and-mortar stores, underscoring the fact that large-cap stocks are dominating small-cap stocks.

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