Rental Market

We all know that urban rental markets across the country have been very strong, and Cleveland is no exception.  I have been told that about 2,000 people are on waiting lists in downtown Cleveland alone.  As anyone who knows me is aware, my son and I like to tour old buildings, so last week we were thrilled to go on a tour of several new housing/office projects taking place in Cleveland.  It is amazing how much residential space has come online in the last few years and even more remarkable how much is planned and under construction.  RELATED:  Cleveland Apartments Rising at Insane Rate

On our tour, we had a behind-the-scenes look at four new projects, only one of which was finished.  The unit we toured in the finished project was being rented out as an AirBnb.  The second project was a relatively small apartment building; the owners were a group of basketball players from a different city who had invested in this building and were rehabbing it.  The third project was a repurposing of a large warehouse space into residential.  The owner told me that this project had never been viable until now and that this was the first project of this kind that they had done.  The last project was a huge 21-story former office building built in 1925.  Again the owner of this building told me that they usually do commercial work and that this was their first venture into residential.

My observation here is that all of these buildings are being done by new entrants into the market.  As excited as I am to see all this new construction and to see my city grow, I cannot help but wonder if we are starting to get into “bubble” territory.  It is often a sign of a bubble when there are new unexperienced speculators entering the market.  Apparently, Cleveland is still near 100% occupancy, but with multiple huge projects coming online in the next couple of years, it will be interesting to see if we can sustain this growth.   WATCH:  Rental Prices Showing Signs of Decline 

Oil Prices

Everyone and their mother (and grandmothers) is talking about oil prices.  It has become THE central topic related to the financial markets.   Two years ago, Wall Street gurus were calling for $120 oil, seeing almost nothing that could hurt oil prices.  Today, these same people are calling for oil to drop to $20 (I have seen as low as $10), with no end in sight and no prospects for higher prices.  This behavior is very typical of market and human behavior.  Anyhow, there are a couple of topics below related to oil, so I thought I would start with a long-term chart of oil prices, including the inflation adjusted price, which is not shown in most charts.  As you can see, real oil prices are as low as they have been in at least 32 years. 

Correction or Bear Market?

One of the biggest questions facing stock market investors going forward is whether the recent weakness is a healthy correction like 2011, or the beginning of a bear market, like 2001 or 2008.  Obviously no one knows the answer to this, but below are a couple of charts that look back at data during previous recessions and bear markets.  In the first chart (below) provided by Strategas, the blue line shows wage rate growth over time.  As you can see, wage inflation of 4+% preceded every recession since 1980.  Currently, wage inflation is a mere 1.9%.

The chart below shows the S&P 500 in white and Consumer Confidence in green.  As you can see, these two series are usually highly correlated, with consumer confidence dropping before a recession and in unison or before the stock market.  In today’s case, while we have experienced a fairly sharp stock market decline, consumer confidence has remained strong and even increased in the face of market weakness.

Recent Market Action

It is widely said that the market hates uncertainty.  This time is no different.  Last week’s Fed decision (or lack thereof) has added additional uncertainty to the market.  While it may seem that keeping rates the same would be better for equities, it may be that raising rates on Thursday would have been good for the stock market because then at least market participants know what they are dealing with.  The chart below shows that the S&P 500 is down 4.3% from its peak on Thursday, which was the day of the Fed release:

Recent Market Action

The stock market weakness I have highlighted in previous blogs continues.  Today, stocks were down fairly strongly.  Fears have shifted from Greece to concerns about global and emerging market economic weakness.  Last week’s currency adjustments in China attracted a lot of attention, not only as a sign of slowing growth in China, but because it raised concerns regarding a currency war.  Of course, all of this feeds into expectations of when the Fed will raise interest rates. Not surprisingly, as the chart below highlights, the odds of a September rate hike have lessened: 

Texas Tea

As you surely are aware, oil and the associated energy stocks have dropped precipitously over the past year.  Although the dynamics and inputs have been different each time, it is interesting to consider the recent decline relative to past periods of extreme weakness.   Looking at similar periods over the past thirty years, the magnitude of the recent drop is “in the neighborhood” of the other declines.  You will notice, however, that from a duration standpoint, all of the other declines lasted longer from peak to trough, suggesting that the current rout may not be over and could hit new lows in the coming months. 

 S&P 500

Leap Second

On June 30^th, there will be a leap second.  Scientists need to do this every so often to syncronize atomic clocks with the slowing rotation of the earth.  Some clocks will read 11:59:59 twice, others will read 11:59:60 and others still will smear the leap, as they call it.  This seems simple enough, but last time this happened, Mozilla, Reddit, LinkedIn and other sites all reported crashes.  In Australia, 400 flights were grounded due to a Qantas Airlines software crash. 

As far as the markets go, this will be the first time in the electronic age that this will have been done during the week.  It is happening at night time here, but apparently we are closing our afterhours trading early.  In Asia, most systems are smearing the leap second by slightly adjusting each second in the day leading up to the event.  A second doesn’t seem like much, but there are now computer trading systems that can react in as little as one-millionth of a second.   

In one second: