Energy & Precious Metals – Weekly Review and Outlook

By Barani Krishnan

The Federal Reserve appears to be allowing the stock market to decline as a strategy to combat rising inflation in the U.S. As fuel and food prices continue to escalate, one must wonder if the housing market will become the next focus of the Fed’s efforts alongside the job market.

Historically, housing prices in the U.S. have trended just slightly above inflation levels. It wasn’t until the period known as the Great Moderation, between 1990 and 2006, that housing returns began to rival those of the stock market. The stock market has typically seen more volatility than the housing market, often delivering greater overall returns — but the current situation may be different.

Last week marked the seventh consecutive week of losses for Wall Street, a streak not seen since the dotcom crash of the late 1990s, as concerns about an economic slowdown weighed heavily on investor sentiment. The S&P 500 index, which tracks the performance of the top 500 U.S. stocks, finished the week near flat at 3,901, having dropped to 3,810 earlier, representing a 20% loss for the year — a threshold that officially indicates a bear market. Overall, the S&P 500 experienced a cumulative loss of 14% over the past seven weeks and has declined more than 18% year-to-date.

The Nasdaq composite ended Friday down 0.3% at 11,355, losing 3.8% over the week and 27% for the year. The Dow Jones Industrial Average remained roughly flat at 31,261, suffering a 2.9% decline for the week and almost 14% for the year.

The downturn in the stock market intensified following the Fed’s announcement of ongoing interest rate hikes, aimed at curbing inflation, which has reached levels not seen in 40 years. Following a 3.5% contraction in 2020 due to the pandemic, the U.S. economy expanded by 5.7% in 2021, its fastest growth since 1982. However, inflation has escalated concurrently, with some measures indicating increases of up to 8.3% year-over-year.

As of this year, economic growth has shown signs of weakness, registering a negative 1.4% in the first quarter, largely influenced by the Russia-Ukraine conflict driving up food and energy prices. Should the economy remain negative in the second quarter, the U.S. would technically fall into recession, which is defined by two consecutive quarters of decline.

Despite the connection between stock performance and the overall economy, it is important to note that the stock market does not encapsulate the economic realities faced by most Americans. The wealthiest 1% of individuals own 50% of the stock market, while the bottom 50% own a mere 0.7%. Consequently, fluctuations in major stock indices such as the S&P 500 have little reflection on the everyday lives of most citizens.

Historically, the Fed would act quickly to stabilize the market; however, experts suggest that this time may be different. A significant sell-off in the stock market might align with the Fed’s objectives to reduce economic activity and subsequently rein in inflation.

When it comes to real estate, the situation is more intricate. The housing market plays a crucial role in the U.S. economy, with approximately 65% of homes being owner-occupied, thus constituting a significant source of household wealth and employment linked to home construction. The housing crash in 2008 triggered the Great Recession, but since then, the market has rebounded rapidly due to economic recovery and heightened buyer demand.

During the pandemic-induced downturn in 2020, the housing market experienced only a brief decline before recovering to record growth levels. Although this resilience could seem promising, it may present challenges considering housing’s role in fueling inflation.

The oil market is also displaying unusual resilience, which is unexpected during a period of stock market instability and economic uncertainty. With prices recently rising by 10% over the past month, oil has surpassed the $110 mark for the first time since March.

However, the climb in energy costs is adversely affecting the finances of many Americans. Gasoline prices have increased daily since late April, leading to a higher share of disposable income being spent on oil.

This raises the question: Is the Fed prepared to consider a correction in the housing market? Some analysts suggest that the housing market may have peaked. Recent indicators, including a 2.4% drop in existing home sales in April, indicate a gradual decline due to rising prices and soaring mortgage rates dissuading potential buyers.

Data shows that the inventory shortage, which has contributed to demand-supply imbalances, may be easing in hot markets like California and Colorado. Furthermore, interest in home purchases seems to be waning as evidenced by a drop in online searches for homes.

Nevertheless, any anticipated downturn in the housing market is unlikely to mirror the 2008 collapse, which was exacerbated by lax regulations and unsustainable credit. The current market operates under stricter regulations and reflects a scenario of demand exceeding supply.

The job market, like the housing sector, may also be reaching its peak. Fed Chair Jerome Powell noted that the job market has strengthened "to an unhealthy level," suggesting that if the ratio of job openings to unemployed individuals were to stabilize, it would ease upward wage pressure. Average hourly wages are currently increasing annually at their fastest rate in four decades.

In summary, while the housing and job markets appear to be in a state of fluctuation, the dynamics suggest that any adjustments will differ significantly from the 2008 economic catastrophe.

Disclaimer: The author, Barani Krishnan, does not have any positions in the commodities or securities discussed in this article.