The end of June marked the worst first-half performance for the S&P 500 since 1970—and it’s hard to find an opinion that predicts it will get better any time soon. The end of Q2 showed the S&P 500 falling more than 16% for the quarter and 20.6% in the first 6 months of the year. That’s its largest first-half decline in 50 years. Meanwhile the Dow Jones Industrial Average showed a 15% drop in the first half of this year and the Nasdaq down a whopping 29.5% for the first half of 2022.
Many economists now believe that it’s not a matter of if but when a recession will present itself. One indicator of recessions that we’ve discussed before is called the Treasury yield curve. When you look at a chart comparing the yields on the 10- and 2-year Treasury notes in a healthy economy, you’ll see the yields have a good amount of buffer between them. When the yields start moving toward each other, that is called a flattening yield curve. When the yield on the 2-year note moves higher than the 10-year, that is called a yield curve inversion and that has historically been an indicator of a recession.
On June 30, the 10-year yield closed at 2.97% and the 2-year closed at 2.92%. That is an extremely flat curve nearing inversion. What that tells economists is investors are more confident in short-term government debt than long-term government debt which is not a healthy place to be in an economy. Keep in mind this was not an inversion and the two yields started getting a little more cushion in pre-trading Friday morning. Also, every recession was preceded by multiple yield curve inversions, but, not all yield curve inversions result in a recession.
Perhaps more concerning in the last week of June were words from Federal Reserve Chairman Jerome Powell. Powell and the Federal Open Market Committee (FOMC) lead the Central Bank which is tasked with keeping inflation in check. Powell spoke to the European Central Bank’s (ECB) Forum on Central Banking and said, “I think we now understand better how little we understand on inflation.”
Powell, along with ECB President Christine Lagarde, cited the “major impact” of energy issues due to Russia’s war against Ukraine. The war, the pair adds, made the job of returning to pre-COVID prices more difficult because it disrupted commerce and drove up the price of food among other items. Powell also doubled down on previous comments that the Central Bank can make no guarantee that it can both tame inflation and keep the labor market going strong.
HOUSING INDUSTRY WAITING FOR A BREAK
An impending recession has done something at least a little positive for the mortgage industry. Freddie Mac’s latest 30-year fixed-rate mortgage average showed very little change week-over-week with the interest rate coming in at 5.7%. Freddie Mac’s economists credit the headwinds of high inflation and “increasing possibility of an economic recession.” Their report also added, “This pause in rate activity should help the housing market rebalance from the breakneck growth of a seller’s market to a more normal pace of home price appreciation.”
“Should” is always the key word. We have been burned by it a few times when we have expected home prices to start cooling off and they did the exact opposite. The latest S&P CoreLogic Case Shiller National Home Price Index slowed a slight decrease in home price appreciation for April with a 20.4% annual increase. March’s reading showed a 20.6% increase, so the slowdown is very minor. The last time this index showed any deceleration was November 2021.
Meanwhile, a more forward looking report may be a more accurate portrayal of what current homebuyers and sellers are experiencing now. Redfin’s latest report on home prices shows “The median asking price of newly-listed homes for sale is down 1.5% from the all-time high it reached in the spring, and a record-high share of sellers dropped their asking price during the four-week period ending June 26.”
Furthermore, as the country continues to transition out of the COVID pandemic, homebuyers’ needs are changing and inflation is playing a big part. Seattle-area Redfin real estate agent Caroline Loudenback is quoted in Redfin’s report and says, “Homebuyers are worried about interest rates, having to go back to the office, getting laid off, and wondering if they can get a better deal by waiting out the market. On the other side, sellers are adjusting to this new reality and learning that sometimes there’s not much they can do to increase buyer interest. Sometimes price isn’t even the reason a home is sitting on the market without selling—some more remote areas that were super popular during the pandemic are now being overlooked as buyers reconsider long commutes with high gas prices.”