Thursday, August 27, 2020 11:53:50 AM
Source: Dow Jones News
By James Mackintosh
Winning investments this year include technology stocks, gold and, umm, lumber. Yes, lumber: pieces of wood may not be as glitzy as Apple or bullion. But like them, lumber and other assets linked to home construction have been big beneficiaries of the Federal Reserve. Helping home-building is one obvious way to help the economy.
Helping Apple shareholders, not so much. Yet, even the Fed's contribution to soaring tech stocks should trickle through eventually, in a convoluted way. That's lucky, because the Fed's new way of thinking laid out by Chairman Jerome Powell on Thursday suggests easy money is here for the long run.
The link from low rates to housing is obvious. Easy money from the Fed dragged the standard 30-year mortgage rate below 3% last month for the first time. Low rates are pushing up house prices despite recession and unemployment, in turn encouraging home building and helping the stocks of housebuilders soar.
Add in lockdown home improvement projects, renewed trade frictions with Canada and low inventories, and it is understandable that lumber prices have more than doubled, and far outpaced shares even of big winners Amazon, Apple, Facebook, Alphabet and Microsoft this year. Stocks of home builders such as D.R. Horton, Inc. and Lennar Corp. are in the tech pack, too, although not so startling as lumber.
The great plus is that these prices suggest at least part of the economy is healing. The Fed is offering cheap money, and home buyers are taking it: Weekly applications for mortgages to buy a home reached the highest this summer since Lehman Brothers collapsed in 2008, according to the Mortgage Bankers Associations of America. It's come down a bit since then, but year-over-year growth of more than 27% in mortgages for purchases is extraordinary with unemployment above 10%.
The trouble is that it takes time for this help to filter out to the rest of the economy, at a time when the country's recovery is deeply unbalanced. Those without jobs who have had their unemployment benefits cut thanks to Washington gridlock will take little comfort from the fact that work-from-homers can afford to buy a bigger place with an office.
A similar division is under way in business: Creditworthy companies able to issue bonds have access to supercheap money. Those with ratings deep into junk territory are having to pay more than before the crisis, while those reliant on banks are finding that lending standards are tightening faster than they did in the 2008-09 recession.
Consider Apple. Helping a $2 trillion company issue low-rate bonds to buy back its shares is hardly a national priority, but is one of the side effects of Fed action. It isn't only a side effect, though. The benefit should, in a roundabout way, eventually end up helping the real economy.
Since the pandemic began, Apple has raised billions of dollars in bonds at low rates, most recently paying 1.25% on 10-year debt, in part to finance buybacks. It can raise the money more cheaply thanks both to the Fed's rate cuts and Fed support of the corporate bond market, boosting Apple's profits and allowing it to do more buybacks (assuming Apple's expansion plans are already fully financed).
The buybacks put some of that money into the hands of an Apple shareholder, who might invest it elsewhere, save it or spend it. Money spent is simple, helping the economy. Money saved in a bank is simple too, hindering growth. If the money is reinvested, it's more complex. It goes into the pocket of the seller of the shares, who then faces the same choice. If everyone keeps reinvesting, prices get pushed up until eventually someone decides to spend the money, or a company decides to issue stock. That, in turn, could be to finance a new project or recapitalize a struggling business, or -- more likely -- to allow investors in a private company to get out via an IPO (then starting the process all over again as they are left with cash and the choice to spend or reinvest).
Investor preferences get in the way of this process, because investors want to buy the winners. So the Fed's easy money pumps up the stock prices of the winners, but does little for the companies that investors can see are suffering, such as airlines, clothing stores and anything connected to tourism.
Capitalism requires winners and losers, but the stock market's divisions are huge. The performance of cheap and expensive stocks has widened more this year than ever before. In large part that reflects the coronavirus reality, as revenue collapses for entire sectors while a shift online boosts the winners.
But the division is accentuated by easy money. Housing, home builders and lumber have joined the pandemic winners thanks to Fed policy. The rest of the economy will have to wait.
Write to James Mackintosh at James.Mackintosh@wsj.com
(END) Dow Jones Newswires
August 27, 2020 11:33 ET (15:33 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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