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The equity markets in the United States tumbled yet again in the week that ended on September 23, 2022. The Dow Jones Industrial Average index briefly entered the bear market territory and closed at a new low as investors remain concerned over the prospect of an upcoming recession as the Federal Bank raised interest rates by 75% to curb inflation.

In the last week, the Dow fell 4%, while the S&ampP 500 and Nasdaq contracted by 4.7% and 5%, respectively.

Treasury yields also rose to their highest levels since 2008. The yield curve inversion deepened as the 2-year Treasury note increased by over 4.2%, which is a sign of investor pessimism regarding the health of the economy in the near term.

Oil prices too cooled down on Friday due to a strong U.S. dollar and recession fears. The U.S. dollar rose to multi-decade highs against the British Pound and euro, startling global investors. The prices for the WTI or West Texas Intermediate fell 5% to $79 per barrel, which was its lowest level since January.

The next week is the final week of Q3, as well as September, which has historically been the worst month for stock market investors. It has so far been the fifth worst start of a year for the equity markets in the U.S.

Earnings and macro news to drive the S&ampP 500 this week

In the upcoming week, several companies such as Nike (NYSE: NKE), Micron Technology (NASDAQ: MU), Bed Bath & Beyond (NASDAQ: BBBY), and Carnival Corp. (NYSE: CCL) will report their quarterly earnings.

On Tuesday, the S&ampP 500 will report the Case-Shiller Home Price Index, which will track home prices. Housing price growth is expected to have decelerated in July after rising 0.4% in June, which was the slowest growth in two years. Home price growth peaked in March and has slowed due to rising bond yields.

The 30-Year mortgage rates just hit 6.7%, more than double compared to the year-ago period and the highest levels since 2008.  The velocity of the recent move in rates is pretty spectacular. Jerome Powell couldn’t have been more explicit during his recent speech: “The housing market may have to go through a correction,” which is a kiss of death for the housing market.

Some key  observations include:

- US real estate affordability dropped violently, it has reached levels not seen since the 1980s

- Buyers purchasing a $500,000 house today, compared to last year, will pay a minimum of $265,000 more in interest alone and a 100% increase in the monthly payment.

- In August, 37.6% of homes in the U.S. sold below the list price

- Luxury home purchases have sunk 28% - the most on record

- Home-flipper Opendoor (NASDAQ: OPEN) lost money on 42% of the properties it sold in August

Why should you watch real estate closely?

Global real estate is the largest asset class in the world, representing upwards of $300 trillion. This is 3x fixed income and equities at ~$100 trillion.

The slowdown we are seeing in real estate prices will reduce demand for other assets such as equities and fixed income via the wealth effect. This, of course, is in addition to the inflation everyone is facing.

With mortgage payments rising dramatically. Buyers who overpaid for houses they couldn’t afford in 2020/2021 (when rates were low) are now feeling the pain, and this will have knock-on repercussions across financial markets.

Consumer confidence reports 

The Conference Board will also release the September update for its CCI or Consumer Confidence reports. It measures consumer optimism with regard to their personal finances and the state of the economy.

Estimates project an increase in confidence from 103.2 in August to 104 in September. Economists also expect the Consumer Sentiment Index to read 59.5, compared to 58.2 in August, due to lower gas prices and moderating inflation numbers.

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