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Market Update
November 20, 2020

Two Charts Saying Two Different Things

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There are two pieces of data that are likely to be top of mind for investors this week. First, US cases of COVID-19 are growing exponentially (Chart 1), which is negative for investors.

Second, US home price affordability is also growing exponentially – i.e. houses are becoming more affordable – which is positive for investors (Chart 2). Indeed, existing home sales in the US grew by 4.3% month-on-month in October, well above consensus estimates.

Chart 1; Source: The COVID Tracking Project.
Chart 2; Source: Invictus, Bureau of Labour Statistics, S&P/Case Shiller, National Association of Realtors.
As of August 2020 Invictus Affordable Price is the home price that a median income household could afford
assuming an agency mortgage, 20% down payment, 31% PTI & 2% taxes and insurance.

How should investors interpret these two pieces of information which say two very different things?

In the long term, the US economy is likely to be fine. Housing is a major contributor to the US economy and Millennials – those born between 1981 and 1996 – are entering their home buying years. The population of Millennials is greater than that of the previous generation, Generation X, so the prospects for the US housing market are good from a demographic standpoint. Furthermore, the fact that housing is also affordable, due to low interest rates, should also ensure that one of the mainstays of the US economy remains strong for the foreseeable future. Long-term investors should be encouraged by this data.

New Normal Different From The Past?

Another interesting debate is whether the “new normal” will be different from the past. To answer this, one can look to those countries that are not experiencing any new outbreaks of COVID-19, such as China. Cinema box office revenue in China has recovered from a low in July, and is already back to 60% of its pre-pandemic peak in October 2019. Additionally, China’s domestic air passenger traffic has recovered to 80% of its previous peak.

Apart from the issues around the US presidential election, which one can expect to be resolved soon, the long-term dangers are twofold: vaccines and interest rates. Specifically, if vaccines are not as good as heralded from recent data releases and if expectations of interest rate hikes exceed what is already priced into markets. Equity markets are indeed valued highly based on some measures but not on those measures which compare valuations to interest rates.

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Market Overview.