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On Tuesday and Wednesday, the S&P 500 and Nasdaq advanced for a third straight session as investors gained some faith in the Federal Reserve's interest-rate plans. Furthermore, a decline in Treasury yields added to investor optimism.
Bond prices recovered some of their earlier losses, bringing the benchmark 10-year Treasury yield down to an all-time low. Unfortunately, disappointing inflation data in Europe and weaker-than-expected U.S. confidence data limited gains.
Inflation is an increase in the prices of goods and services. It poses a serious problem for many investors, as it can significantly reduce purchasing power.
The Federal Reserve and other central banks often raise short-term interest rates to combat inflation. This makes borrowing money costlier for businesses and consumers, potentially leading to economic slowdowns.
Economists measure inflation by examining price changes across a specific basket of items, known as a price index. These figures are usually published by statistical agencies such as the Consumer Price Index or Personal Consumption Expenditure in the U.S.
A variety of factors can affect a price index, such as how much an individual consumes of each item and its share in the average household budget. To get an accurate reading on inflation, experts usually rely on core inflation - that is, inflation that excludes food and energy prices.
Recent inflation is being driven mainly by an increase in energy costs, as higher oil prices and currency depreciation take money out of circulation. Furthermore, rising oil costs make importing goods costlier, which could put a damper on business activity and consumer spending alike.
It is essential to remember that headline inflation is just one measure of inflation; it includes other components like healthcare and education costs which may not always be reflected in the inflation rate. That is why paying close attention to data can be so crucial.
In the United States, the Consumer Price Index is the primary gauge of inflation. This index tracks prices across a broad range of goods and services and is released monthly by the Bureau of Labor Statistics.
Though inflation can be a source of worry for investors, it doesn't have to lead to long-term issues. Indeed, some economists suggest that lower, stable, and predictable rates of inflation are generally beneficial for the economy.
However, inflation has been rising at an uncontrollable pace in recent years, alarming both policymakers and investors alike. Furthermore, the Fed is expected to keep raising interest rates soon; this puts additional stress on the economy and markets--particularly stock markets--with investors ultimately having the final say as to how they react to this data.
The bond yield is an important indicator of how much interest an investor will earn. This metric is calculated by dividing the annual coupon payment by the current market price of a bond, expressed as a percentage. Other factors like coupon rate, par value and payment frequency can also affect yield on bonds.
The US 10-year Treasury yield is currently near 3.9%, while the 2-year is around 4.8%* (as of this writing). Both have been driven higher by recent Fed hikes and remain near their year-to-date highs*.
Global inflation has caused central banks around the world to raise interest rates in an effort to combat it. This has resulted in higher bond yields, since higher interest rates provide investors with an incentive to purchase bonds rather than riskier assets such as equities.
Long-term bond investors have benefited from higher yields, but short-term investors have suffered as their investments have fallen in value due to lower bond prices due to higher yields. It makes purchasing these bonds at their lower yields more expensive.
Bond yields will likely continue to increase as the Federal Reserve continues to hike interest rates. It is essential to remember that bond yields are only one factor in determining bond prices and the economy as other elements such as changes in inflation data or Federal Reserve decisions can also influence bond prices.
The 10-year Treasury yield is an indicator of long-term investor sentiment toward bonds. This is because Treasury sales the bonds through auction, with yields determined through bidding. When markets believe they can find higher-returning investments elsewhere, Treasury may lower its bid on its bonds and cause their price to decrease, leading to a higher yield.
Bond yields will move higher with the market as investors decide how much to pay for bonds in the future, helping determine whether or not buyers are interested in purchasing a bond. Typically, yields are lower when there's recession in the economy and higher when sentiment is positive.
Earnings are an important metric for investors, as they offer insight into a company's performance. Earnings per share is calculated by dividing net profits by the number of outstanding shares. When companies report their results, Wall Street pays close attention to see whether they surpass expectations or not.
Typically, when a company beats analyst estimates, its stock price increases and when it doesn't, the price decreases. However, there are several factors that can influence a stock's price before it releases its earnings results.
Analyst expectations are determined by a company's historical performance and may be adjusted by experts who monitor market trends. They take into account how much profit a business can sustain in the future and how quickly it may expand.
Analysts can utilize sales data to forecast earnings for a company's upcoming quarter, helping them accurately gauge stock price movements.
Another factor that can influence a company's earnings is how it responds to changes in the economy, such as an increase in interest rates or reduced spending. A decrease in demand may cause them to miss or overshoot their earnings target, while rising living costs make profits appear lower than they actually are.
Staying ahead of the earnings curve requires staying informed on your favorite companies and their latest results. Doing this allows you to anticipate what to expect from these announcements, allowing you to reevaluate your own investment strategy when necessary.
Investors should also be aware that some companies, particularly those in the technology sector, may experience greater price swings related to their earnings than others. For instance, Netflix experienced a major jump in its stock price following its fourth-quarter earnings report.
The Optimism (OP) price has recently declined from its all-time high. This could be because investors are taking profits and waiting for the price to increase again, but there is still a substantial influx of capital into OP markets.
Interest rates on credit cards, loans and other debts are an integral part of our financial lives. They determine how much we can spend and how much it will cost us in the long run - both for ourselves and others.
The Federal Reserve sets interest rates to promote economic stability by keeping inflation between 2% and 3%. This target helps keep businesses expanding steadily, people employed, and wages rising - though achieving this objective can often prove challenging due to unexpected obstacles.
It is essential to comprehend how interest rates impact different markets in order to make informed decisions regarding your finances and investments.
Interest rates rising force companies to pay more money for borrowings, potentially impacting both their top and bottom lines by leading them to lose cash flow. Furthermore, companies may need to cut back on expenses which could result in decreased profits.
This is a major risk for the stock market. If enough companies experience drops in their share prices, it could drag down major indexes such as the S&P 500 and Dow Jones Industrial Average.
Some sectors benefit from rising interest rates, such as banks and mortgage companies. On the other hand, certain sectors such as retail and consumer services industries may experience negative repercussions.
For instance, if the Fed raises rates to curb inflation, this could make it more expensive for businesses and consumers to purchase goods and services. This could impact demand for certain items such as cars or homes.
Investors worried about this trend can invest in long-term bonds such as Treasury Inflation Protected Securities (TIPS). These provide investors with a stable rate of return while decreasing their exposure to risk.
Investors may opt to place their funds into certificates of deposit (CDs). CDs typically feature low interest rates, helping to cushion the impact of high rates on the stock market.
However, the relationship between interest rates and stocks isn't always linear. It depends on what's happening with the economy, whether interest rates are expected to go up or down, and how investors anticipate the Fed responding.
Oversupply is not limited to a few expensive cities; it has spread throughout the entire nation.
Housing prices and rents tend to be closely linked, particularly in closed-access metropolitan areas. These areas have less elastic long-term supply than others, leading to higher housing costs which can largely be attributed to rising rents.
Los Angeles, one of America's most vibrant cities, draws people from around the globe with its diverse entertainment and arts offerings. Additionally, it serves as a hub for business, commerce and technology innovation.
Today, Los Angeles is home to over 18 million people - making it both the most populous city in California and second in America. Surrounded by mountains and valleys as well as the Pacific Ocean and nearby desert landscape, this bustling metropolis has something for everyone.
Los Angeles is uniquely diverse, featuring a multitude of ethnic groups. This diversity can be seen throughout its neighborhoods; African-Americans tend to congregate in East Los Angeles while Hispanics are spread out across most of the city.
Despite its diversity, the city of Los Angeles has a history of racial tensions - such as the Watts Riots in the 1960s and Rodney King riots in 1992. Despite these setbacks, however, Los Angeles has continued to thrive and become an attractive home for people from around the globe.
Although the housing market has seen a dramatic surge in new development, there is now an oversupply of residential units on the market - particularly within Central Los Angeles.
Accordingly, existing home prices in Los Angeles are declining due to a shortage of available inventory and homeowners holding onto their properties while waiting for market conditions to improve.
Los Angeles' housing market is experiencing major transformations, making it impossible to accurately predict how this will impact overall real estate demand. As the economy recovers, more people will begin moving here and more new construction will be completed, however this recovery won't happen overnight.
Due to a shortage of space for new apartments and other residential units, prices in some areas have begun to decline. For instance, rents for apartments have decreased 15% in West Hollywood neighborhood of Los Angeles over the last year and 7% over two years, according to NAR data.
Due to an abundance of housing stock, some housing markets have seen price declines; examples include Boston, Los Angeles, New York City and San Francisco. These cities are notable for allowing lower new housing construction rates than other metro areas even as rents and home prices have skyrocketed above national norms.
Due to the oversupply issue, many real estate investors have lost faith in the market and pulled money out of it. REITs with significant investments like Avalon Bay (AVB) and Equity Residential (EQR) have had to reduce their revenue forecasts multiple times this year.
According to the NAR, home sales in America have declined nearly 18% year-over-year due to a large number of potential home buyers having pulled out of the market. As a result, less inventory remains for purchase on the open market.
Another major reason why home prices have dropped is an increase in vacancy rates across the country. Particularly, office markets have experienced an uptick due to high numbers of leases expiring over the coming years.
Vacancies are also rising in other sectors, such as apartments and shopping malls. In the United States alone, the vacancy rate for apartment buildings rose to 6.5% in the first quarter from 5.3% a year earlier.
Although apartment vacancy rates tend to be positive indicators, there is still growing concern about an oversupply of apartments across the country. Particularly, some markets have witnessed excess supply at the high-end of the market where developers are building apartments which lack demand and have low vacancy rates.
The commercial office market has been adversely impacted by an oversupply of vacant space, especially in large buildings. Some properties have seen their values decline, leading to reduced property tax revenues. Furthermore, several large commercial properties may default on their 2021 property tax bills.
Despite an influx of new apartments in Manhattan and Brooklyn, prices continue to climb. A long-running shortage of housing has contributed to rent increases, while recent population loss and a return to urban living have further driven prices up.
According to a report from the Real Estate Board of New York, 560,000 additional housing units are necessary in New York City by 2030 and construction is not keeping up with demand. Zoning restrictions, high land and construction costs, outdated building and construction codes, as well as an oppressive property tax system that places heavy burden on rental buildings all contribute to this crisis.
The luxury residential market in NYC has experienced an acute oversupply, particularly among affluent buyers due to low mortgage rates and rising stock markets during the pandemic. As a result, luxury home sales in the city have exceeded any other price range.
Now that interest rates have begun to rise again, those buyers are feeling the pinch as home prices decline. This has resulted in an extended period of DOM (days on market) for some properties - now running longer than three months.
This is encouraging news for homeowners, as it suggests their homes won't depreciate as quickly in the future. Unfortunately, however, it also indicates a decrease in the number of active listings for sale.
Another problem affecting the New York City market is an increase in short-term rentals, especially those held for occasional or seasonal use. Although these are usually not included in official counts of apartment vacancies in the city's Housing and Vacancy Survey, they account for a considerable share of available inventory and could continue to reduce supply.
Finally, the shift towards remote work is revolutionizing the city's housing market. This trend is expected to accelerate over the coming years and could have an impact on where people choose to reside.
These factors suggest the New York City housing market will experience a major slowdown in 2023. This will leave fewer homes for buyers, but also reduce demand overall. While this could potentially have an adverse effect on prices, it's unclear if they will decrease significantly.
Though the national picture is generally positive, five U.S. metro areas are particularly hard-hit by oversupply: New York, Los Angeles, San Francisco, Washington and Dallas-Fort Worth.
Fannie Mae reports that 630,000 new multifamily units are under construction across America, with 440,000 expected to be completed by 2019. However, these properties tend to be concentrated in higher-cost markets.
Due to this, job growth in certain markets has been weaker than elsewhere. This trend is especially evident in metro areas with some of America's priciest rental housing - such as Los Angeles, San Francisco and San Jose.
Due to fewer jobs being available than last year in these markets, more workers are finding it harder or have given up altogether. As a result, there is an oversupply of rental housing in these cities which has driven up prices.
Another pressing concern in these metro areas has been a shortage of affordable Class A multifamily housing units. This shortage is compounded by an inadequate inventory of available affordable homes, leading to higher prices even when demand is strong, as it has recently.
One way to solve this problem is by reducing parking requirements in local zoning laws. This could be done through various measures, such as restricting how much off-street parking developers must provide for each new development or creating shared parking options.
The key is finding a balance between parking needs and housing that meets community demands. In some cases, reducing parking requirements may help keep construction costs down while maintaining an adequate supply of housing.
Resolving the oversupply issue in Boston requires ensuring new construction can continue to proceed. This can be accomplished through policies which reduce off-street parking requirements - an issue common to many cities and towns dealing with an excess of homes.