The Weekly Wrap: Groceries Higher, Housing Activity Stabilizing As Tech Takes a Hit
Grocery Costs Keep Rising
If you want to save on your food bill for the next few months, you might want to eat more vegetarian meals. Otherwise, brace yourself for the continuing rise in grocery costs.
According to the United States Department of Agriculture (USDA), food prices will increase 2.5 to 3.5 percent this year. In 2022, the increase will slow to 1.5 to 2.5 percent, says the agency.
Fresh vegetables have increased .4 percent, the least of all food categories, reports the USDA. One reason vegetable prices have been so stable is that they are easily sourced from Mexico.
On the other hand, pork has increased the most at 5.4 percent.
Labor Shortage Pushes Meat Prices Higher
A labor shortage is blamed for rising pork prices.
“The U.S. pork industry is suffering from a serious labor shortage, negatively impacting farms and processing plants,” says a report from the National Pork Producers Council.
Fewer workers mean fewer pigs processed. That leads to higher pork prices.
Weather is always a factor in farm prices. This year’s weather has been horrific for many farmers, especially in the West and upper Midwest.
Drought has burned many crops in the field. Those crops not only feed us, but they also feed farm animals. As a result, many ranchers have sold or slaughtered their livestock early. That leaves fewer breed animals to build next year’s herd.
Yes, the supply chain bottlenecks drive food prices higher. However, there are domestic problems as well.
Remember the winter storm that hit Texas particularly hard? That resulted in a power outage that shut down the world’s largest petrochemical complex. That leads to shortages and a jump in the price of polyurethane and other plastics.
Think of all the things that contain plastic. Cars, headphones, toothbrushes, and on and on. In your local grocery, you will find plastic wrapping meat containers, holding beverage six-packs together, and serving as milk jugs among other things.
You can not change prices. However, you can change your behavior. Here are a couple of ideas.
- Eat before you shop. With a full stomach, you are less likely to make costly impulse buys.
- Plan Ahead. Sticking to a disciplined food budget keeps costs down.
- Join your store’s loyalty program. This will give you access to discounts and may include points toward reduced or free purchases.
Housing Market Stabilizing
After exhausting itself racing to new heights in prices and demand, the housing market is beginning to stabilize.
“Home prices nationwide were up 16.2% year-over-year in August,” according to national real estate brokerage Redfin. “At the same time, the number of homes sold fell 1.6% and the number of homes for sale fell 26.1%.”
The median price for a home today stands at $380,271, according to Redfin. That is a drop of $5,000 from July’s high.
Some Building Costs Easing, Activity Steady
The National Association of Home Builders (NAHB) housing market index (HMI) moved up from 75 to 76 in August. That is well off its high of 90 in November.
The NAHB/Wells Fargo index is a survey asking members to rate market conditions for the sale of new homes. A rating of 50 or better is considered positive.
“The single-family building market has moved off the unsustainably hot pace of construction of last fall,” writes NAHB Chief Economist Robert Dietz, “and has reached a still hot, but more stable level of activity, as reflected in the September HMI.”.
“While building material challenges persist, the rate of cost growth has eased for some products, but the job openings rate in construction is trending higher,” Dietz said.
Interest Rates Are a Game Changer
As inflation rises (see the story below) mortgage rates rise. Consequently, fewer people will be able to finance a home.
Competition to buy houses has been fierce this year. Buyers have been making all-cash deals and forgoing inspections to get an edge in the buying frenzy. However, that is changing.
“Sellers appear to be more inclined to reduce prices than they had been as bidding wars cool down across the country,” says a staff report in The Real Deal. “Listing adjustments were up slightly from August 2020, with 17.3 percent of active listings having seen a price adjustment.”
Supply/Price Still Matter
Many homebuyers are priced out of the market.
As referenced above, home prices increased 16.2 percent year over year in August. The median sales price was $380,271.
Stabilization in the housing market is a positive sign for buyers. However, many will have to wait to make a purchase until the supply of homes increases to meet demand.
Treasury Rates, Inflation Push Tech Stocks Around – Opportunities Loom
The stock market has been up and down more times this summer than a punch drunk fighter. Its most recent battering came Tuesday when 10-year Treasury yields jumped 23 basis points from 1.32 percent to 1.54 percent. That is the highest rate since June.
The impact of the rate hike sent tech stocks down and increased inflation concerns.
“High-growth stocks tend to underperform when Treasury yields are rising, typically felt the most by the technology sector which is the most overbought in relative terms.” according to Katie Stockton of Fairlead Strategies.
Size Really Does Not Matter
A 1.54 percent yield may not set your head spinning. Certainly, you can find higher returns in the right stocks. However, the importance is the yield trend.
The spread between yields on the two-year and 10-year Treasuries indicates a trend in rates.
According to data from the St. Louis Federal Reserve Bank, the trend is rising rates.
“All of that is taking one of the weights that had been holding yields low and removing it,” Sameer Samana, of the Wells Fargo Investment Institute, told the Associated Press. “That clearly has a big impact on larger cap, higher growth, higher multiple stocks.”
Techs Take a Hit
Tuesday’s Treasury rate increase triggered a selloff of tech stocks.
Big names such as Amazon, Facebook, Alphabet (Googles’ parent), and Microsoft declined more than two percent. Apple dropped over one percent. In addition, the tech-heavy Nasdaq 100 lost 2.8 percent.
Interest Over Growth
Tech stocks were hit particularly hard because they promise investors growth. In other words, no returns today, but a big payout down the road.
When bond rates rise, indicating lending rates and inflation will rise, many investors move money out of growth in favor of a guaranteed return.
Where Can You Go From Here
The first thing you can do is take a deep breath. There is turmoil in the market. However, there is no blood in the streets. If you are a long-term investor, your growth stocks may do just fine.
However, with inflation and Treasuries rising, it is a good time to consider value investing. Value stocks tend to trade at lower prices in relation to their dividends, sales, and earnings. Perhaps the greatest apostle of value investing is Warren Buffet. I hear he has done okay.
Another value advocate is Rob Arnott, founder of Research Affiliates. He thinks there is a great opportunity to buy value stocks now.
“When most liquid asset classes are set to deliver a negative or near-zero real return, value stocks stand out as the only asset class likely to generate a 5%–10% real return over the coming decade,” writes Arnott in a recent article. “The opportunity to buy value stocks may be short-lived and we may wait decades for an opportunity of a similar scale.”
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