Weekly Investment Update (05/19/2023)

U.S. Homebuilder Data Stabilize at Lower Levels

U.S. homebuilder data appear to be gradually recovering after a year-long slowdown as the constrained supply of existing homes has spurred new building activity. U.S. housing starts rose in April, reflecting an increase in new single-family and multi-family projects. Constrained supply dynamics resulting from tight inventory in the existing home market are driving new construction. Housing inventory remains tight, in part because the roughly 14 million existing homeowners who financed their homes during the pandemic are less likely to move and take on new decade-high mortgage rates. Homebuilding sentiment has continued to rise after troughing in December 2022, with May marking the fifth consecutive month of improvement. The lack of housing inventory appears to be driving prospective buyers toward new construction, a segment that has seen a more favorable backdrop given declining commodity prices and easing supply chain constraints.

Though a lack of inventory could continue to support future building activity, elevated mortgage rates, tighter credit conditions, and low affordability remain headwinds for the residential housing market. Home ownership affordability remains near record lows even as it has improved in recent months on the back of declining mortgage rates from the peak in late 2022. The Fed’s national home ownership affordability index, which measures the ability of a median-income household to afford a median-priced home, is currently at 75.2, far below the pre-COVID level of 105 and the affordability threshold of 100. While homebuilder data has begun to stabilize on account of constrained inventory, headwinds — such as tighter credit, softening economic conditions, and historically high mortgage rates — are likely to persist in the near term. Bessemer’s All Equity Model portfolio remains underweight the real estate sector relative to its benchmark.

Consumer Spending Slows While Pockets of Resilience Remain

Consumer resilience has been a prominent theme over the last year, but the backdrop for the consumer has become more nuanced in recent months. A challenging macroeconomic environment is driving the consumer to become more cautious, price sensitive, and selective on purchases. Consequently, the consumer spending transition from goods to services has become more pronounced. Goods-producing industries generally have shown signs that spending is slowing and that discretionary purchases are normalizing following outsized demand due to excess savings; however, travel demand remains robust. Such shifting trends are reflected in credit card data, which has more broadly shown a softening in spending momentum from the high levels seen in recent months.

First quarter earnings reports from public companies echo the sentiment of a softening demand environment while demonstrating that there are still pockets of consumer strength. This week, Bessemer holding Home Depot reported earnings and noted that it is seeing some moderation after a period of robust demand. Purchase behaviors indicate that consumers are holding off on larger projects following a period of elevated spending on home improvements. A pullback in spending on big ticket items is often seen as a negative economic indicator of consumer confidence, though this segment was largely affected by a pull-forward effect during the pandemic. Other retailers this week similarly noted that consumers have been more cautious on discretionary purchases. Walmart, a Bessemer holding, echoed commentary on consumer pullback but beat earnings expectations. We believe it is well positioned to capture the consumer trade down, particularly in grocery as well as health and wellness. On the services side, Bessemer holding Visa has continued to see strong travel demand with outbound travel from the U.S. far surpassing pre-COVID levels.

While the outlook for consumer spending is dependent on a variety of factors, the most important is the labor market. We expect services spending to remain strong until there is a meaningful loosening within the labor market.