February 2023 saw the market capitalization of new homes sold in the U.S. rise for the first time in eleven months. A combination of a higher number of new homes sold and a small increase in the average sale price of new homes sold contributed to the first increase in this measure since March 2022.

While these changes are based on preliminary estimates, they do confirm the change in momentum observed a month earlier. In January 2023, the decline in the market cap of new homes sold slowed for the first time in months. The new data indicates positive momentum building in the market, which in turn helps explain why U.S. homebuilders were becoming more optimistic last month.

Much of that optimism is tied to the direction of mortgage rates, which fell in February 2023, helping make new homes more affordable. We'll take a closer look at the trends for the affordability of new homes sometime in the next week, but for now, here's the latest update to the big picture for new home builders and the U.S. economy.

This chart shows the time-shifted rolling twelve month average of the U.S. new home market capitalization for February 2023 is $25.41 billion. That figure represents a small increase from January 2023's revised $25.34 billion. The following two charts show the latest changes in the trends for new home sales and prices:

Sales of new homes increased:

New home prices rose a small amount:

The question for new home builders is whether this positive momentum can overcome the negative conditions that are developing in the U.S. economy. We anticipate it will continue in March 2023, but what happens after the first quarter of 2023 ends will hinge on other economic factors.

References

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 23 March 2023. 

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 23 March 2023. 

Image credit: U.S. Census Bureau: New Single-Family Homes Sold Not as Large as They Used to Be.

The S&P 500 (Index: SPX) climbed 1.4% from the previous week's close to wrap up the trading week ending Friday, 24 March 2023 at 3970.99.

During the week, dividend futures rebounded from the previous week's low for the quarter. However, the bigger story is that expectations took hold the Federal Reserve is done with rate hikes after hiking them by a quarter point on Wednesday, 22 March 2023 and will be swinging to cut rates instead in the weeks ahead.

The latest update to the alternative futures chart shows the S&P 500's trajectory continued persistently tracking below the redzone forecast range we established almost three months ago, which has now reached its end.

With the increased focus on how the Fed will adapt its monetary policies during 2023-Q2, the Fed's rate hike provides a valuable calibration point we can use to quantify the shift in the value of dividend futures-based model's multiplier. The model requires the multiplier's value be set according to empirical observations, where a first pass suggests it has shifted from 0.0 to +1.5 as a result of the interest rate hike-induced distress in the U.S. banking system. That new shift follows the multiplier having recently shifted from +2.0 to +0.0 in early January 2022.

The next chart sets up the new hypothesis test utilizing a multiplier of about +1.5 starting from 9 March 2023, coinciding with the development of the then-impending failure of Silicon Valley Bank.

With this shift in multiplier, we see the redzone forecast range adjust accordingly, as if we has made the assumption the multiplier, m, would shift from +0.0 to +1.5 on 9 March 2023 from the very beginning. This visual adjustment is an artifact of how we set up redzone forecast ranges, where we anchor one point in the past and the other in the future to allow them to dynamically adapt along with changes in future expectations.

Going forward, we're starting with the assumption that m = +1.5 and that investors are focusing on 2023-Q2 in setting their forward-looking focus. Ideally, we should see the trajectory of the S&P 500 track along within a few percent of the alternative future projection associated with 2023-Q2. In reality, we anticipate a higher level of volatility driven by the onset of new information.

Speaking of which, here are the past trading week's market moving headlines:

Monday, 20 March 2023

• Signs and portents for the U.S. economy:
• Oil prices rebound after hitting lowest since 2021 on banking fears
• Investors uncertain of Fed minions' next steps following bank failures, bailouts:
• Uncertainty reigns as Fed considers interest rate hike
• Factbox-Banking turmoil may prompt Fed to go slow on interest rate hikes
• Marketmind: Fed halt being priced as bank blaze smoulders
• The canary is alive and chirping a year into Fed's rate hiking cycle
• Failing bank Credit Suisse bought by UBS in forced sale:
• UBS to take over Credit Suisse, assume up to 5 billion Swiss francs in losses
• Bank shares rise after Credit Suisse rescue eases crisis
• Explainer-Why markets are in uproar over a risky bank bond known as AT1
• BOJ minions claim Japan's banks are stable, worry about side effects of never-ending stimulus:
• Japan says banking system stable, plays down risk of contagion
• BOJ debated side effects of easy policy at March meeting
• Bigger trouble as Chinese, global economy not growing as quickly as expected:
• Taiwan Feb export orders miss forecast, China a big drag
• Bigger trouble developing in the Eurozone:
• German economy heading for contraction in Q1, Bundesbank says
• German producer prices rise more than expected in February
• ECB minions looking to exploit bank system crisis to achieve inflation target, claim risk of Eurozone bank failures is small:
• Market turmoil may do ECB's work in dampening demand - Lagarde
• ECB's Centeno sees some build-up of inflationary tensions
• ECB's Stournaras: Chance of contagion to EU banks "very small"
• Factbox-What can the ECB do to stop the banking crisis?
• Wall St ends higher as bank contagion fears ease, Fed eyed
• Credit Suisse rescue eases crisis fears, First Republic shares dive

Tuesday, 21 March 2023

• Signs and portents for the U.S. economy:
• Oil rises 2% in retreat from 15-mth low as banking fears subside
• US officials study ways to expand FDIC coverage to all deposits -Bloomberg News
• Yellen vows to safeguard deposits at smaller U.S. banks, intervene if needed
• Lower mortgage rates boost US home sales in February
• ECB minions having second thoughts about more rate hikes:
• ECB's Holzmann waters down call for three more rate hikes
• Wall Street ends green on bank bounce as Fed takes focus
• Shares jump but investor fears about bank 'whack-a-mole' linger
• First Republic leads surge in bank stocks as Fed comes into focus

Wednesday, 22 March 2023

• Signs and portents for the U.S. economy:
• Oil up 2% as dollar weakens on small US Fed rate hike
• Falling US gasoline stockpiles signal a repeat of last summer's high prices
• Investors on edge before the Fed minions' meeting:
• As Fed meeting looms, economists see central bank balance sheet in new light
• Fed's Powell faces political storm, policy minefield over SVB oversight
• Fed minions deliver quarter point rate hike, hint at pause in rate hikes to focus on failing banks:
• U.S. Fed delivers small rate hike amid global banking turmoil
• Fed sees credit drawdown looming, shifts towards pause on rate hikes
• Bank deposits have stabilized in last week, Powell says
• Yellen, caught between financial markets and US Congress, pleases neither
• Yellen Pulls Rug Out From Powell's Dovish Promises: Gold Gains As Banks Bust
• "We Are Headed For Another Train Wreck": Bill Ackman Blames Janet Yellen For Restarting The Bank Run
• Yellen says US banks shoring up liquidity to guard against runs
• Explainer-How safe is my money in a U.S. bank and what is insured?
• Bigger stimulus developing in China:
• China to boost support for high-end manufacturing - Premier Li
• Mixed economic signals in Japan:
• Japan's land prices up at fastest pace since 2008 on gradual econ recovery
• Japan cuts view on industrial output, vigilant on market volatility
• ECB minions thinking about their carbon footprint while German officials worry about inflation picking up if bank failures stop ECB from focusing on fighting inflation:
• ECB to publish first detailed carbon footprint
• German 'wise ones' see inflation uptick if banking woes halt rate rises
• Stubborn inflation may require more ECB rate hikes: Nagel
• Wall St ends sharply lower as Powell warns inflation fight continues
• Analysis-Investors cautious on U.S. stocks, even though Fed hikes may soon end

Thursday, 23 March 2023

• Signs and portents for the U.S. economy:
• U.S. new home sales post third straight monthly gain in February
• Oil drops 1% as US in no rush to refill strategic reserve
• Biden administration Treasury Secretary forced to backtrack:
• Yellen tries to assuage investor fears as bank stocks slide
• Yellen, caught between markets and US Congress, tweaks bank safety message
• Fed minions seen on verge of policy change for setting interest rates:
• The sure-footed Fed of the past year now in doubt about next policy move
• More central bank minions putting rate hikes on hold, addressing potential for bank failures:
• Brazil central bank holds rates, flags increased inflation expectations
• Bank of Korea says non-bank financial firms face stress from property market
• New Zealand central bank says economy slowing, still not sure if rates high enough
• Analysis-End of central bank rate hikes now firmly on the horizon
• Other central bank minions continue rate hike mania:
• Hong Kong central bank raises policy rate after Fed hike
• Philippines central bank stays in inflation-fighting mode, hikes rates by 25 bps
• Taiwan central bank unexpectedly raises rates on inflation concerns
• Bank of England raises interest rates again, sees inflation falling
• Swiss National Bank raises rates, says Credit Suisse takeover prevented larger crisis
• ECB minions still singing from rate hike hymnal:
• ECB could hike rates again in May to tame stubborn inflation: Knot
• Wall St ends higher as Yellen vows actions to safeguard deposits

Friday, 24 March 2023

• Signs and portents for the U.S. economy:
• How the 2023 banking crisis unfolded
• US business investment appears weak in first quarter as orders rise moderately
• U.S. business activity accelerates in March - S&P Global survey
• End of central bank rate hikes now firmly on the horizon
• Oil settles down on worries over European banks, U.S. crude reserve
• Oil slides as U.S. holds off refilling strategic reserve
• Fed minions try putting on brave face despite bank crisis, credit crunch, risks to commercial real estate market:
• Fed officials say sense of financial stability cleared path for rate hike
• Fed's policy rate will need to rise as bank stress eases, Bullard says
• The Fed sees a looming credit crunch. What's that?
• Real estate leader on NY Fed board warns on commercial real estate risks
• Bigger trouble developing in Japan:
• Japan's factory activity contracts for fifth month - PMI
• BOJ tankan to show Q1 factory mood hitting lowest since late 2020: Reuters poll
• Japan's consumer inflation off 41-year high but cost pressure persists
• Bigger trouble developing in Asia, all over:
• Asian company earnings cut on China, global slowdown worries
• ECB minions committing to rate hikes despite banking sector turmoil, say no problems with Eurozone banks:
• ECB rates must rise; bank share volatility unsurprising, ECB's Nagel says
• European banks default-risk indicator jumps, AT1 bonds fall
• ECB, EU leaders say European banks well capitalised, liquid
• Marketmind: Bank angst persists, unnerves Europe
• Euro zone services firms enjoy buoyant March but factories struggle -flash PMI
• Wall Street ends volatile week higher as Fed officials ease bank fears
• World stocks gyrate as bank contagion fears bite
• Explainer-Why markets are in uproar over a risky bank bond known as AT1

After the Federal Reserve's quarter point rate hike on 22 March 2023, the CME Group's FedWatch Tool now anticipates the Fed has finished the series of rate hikes it began a year earlier. From the current Federal Funds Rate target range of 4.75-5.00%, the FedWatch tool predicts the Fed will be forced initiate a series of quarter point rate cuts at six weeks intervals starting after the FOMC meets on 26 July (2023-Q3) and continuing through December (2023-Q4). In 2024, the FedWatch tool projects at least one quarter point rate cut per quarter through September (2024-Q3), when the Federal Funds Rate target range will have fallen to 2.75-3.00%.

The Atlanta Fed's GDPNow tool's projection for real GDP growth in the first quarter of 2023 held steady at +3.2%. With the first calendar quarter of 2023 nearly over, the GDPNow indicator continues transitioning to look backward instead of forward. The Bureau of Economic Analysis' initial estimate of GDP in 2023-Q1 is scheduled to be released on 27 April 2023.

Image credit: WikiMedia Commons. Creative Commons: CC0 1.0 Universal (CC0 1.0) Public Domain Dedication.

The Edge Hotel School at the University of Essex has unleashed the power of geometry to give its students an edge within the very competitive hospitality industry. They've identified the optimal angle for slicing potatoes to craft the ultimate roasted potato dish.

Their two-minute long video summarizes their research findings:

By slicing a potato in half along its long axis, then cutting the halves at a 30-degree angle, they maximize their surface area of the potatoes, which leads to better tasting results when they're roasted.

Economically prepare better tasting food is a very big deal in the hospitality industry. Developing a method of economically preparing a better tasting roasted potato can indeed make a difference at the margin. A difference that can determine success or failure in an industry known for having relatively low net margins.

HT: The UI Junkie.

Previously on Political Calculations

• Science Creates the Perfect Piece of Toast
• The Costs of a Cup of Coffee
• Romaine and Blockchain
• Inventions in Everything: A Cold, Refreshing, CRISPR Beer

Unfavorable changes. Just saying that phrase doesn't sound good, because it means something has turned for the worse.

When it comes to stock market dividends, it is, unfortunately, a very well established phrase. We suspect it was first deployed for that purpose on 5 October 1927 by Bertie Forbes, the founder of the long-running business magazine that still bears his name, though his surviving family members no longer own a majority stake in the company he established. At the time, he was reporting on the Roaring 1920s stock market in his syndicated column, which he quantified by counting up the dividend changes being announced each month by the firms whose stocks he tracked. With the booming stock market of that era, he was mainly reporting on favorable changes.

But in this column, Forbes used the term "unfavorable" for the first time to describe the combined total of dividend reductions and omissions that had occurred, noting there had been 21 such announcements in September 1927, and 131 overall in the year to date. In another two years, Forbes would come to use that phrase much more often as the Great Depression got underway and the number of unfavorable dividend changes exploded. His terminology took hold among the financial analysts of the day and has survived to the present.

We've previously presented what dividend reductions, or reductions, looked like through the Great Depression. But that only tells less than half of the story of how bad things were during that time. To tell the whole story, we need to add omitted (or passed) dividend announcements to the monthly totals of dividend reductions.

That's what we're doing today. But not just for the Great Depression, where we have previously compiled monthly data from January 1929 through December 1936 originally provided by the Standard Statistics Company, one of the precursor firms for today's Standard and Poor. We also have S&P's data for unfavorable dividends that runs from January 1955 through February 2023. The following chart shows all the historical data for unfavorable dividend changes we've been able to obtain at this point in time.

Aside from the missing data in the period from January 1937 through December 1954, the data we do have does an amazing job communicating the scale of how bad the United States' worst economic crises were.

If you go by the height of the number of unfavorable dividend changes, we find the Coronavirus Recession ranks second to the Great Depression. The sheer mass and duration of the Great Depression's dividend reductions and omissions clearly mark that event as far, far worse. If not for the Coronavirus Recession spike, the so-called "Great Recession" of 2008-2009 would rank second and, if we compare the areas under the numbers of unfavorable dividend changes each month, it does.

We also see some potentially useful thresholds. For the periods where we have data, having the number of unfavorable dividend changes reach a level of 50 or higher in a single month often coincides with official periods of recession or significant distress for U.S. businesses. Historically, unfavorable changes that reach higher than 100 per month point to periods characterized by severe levels of economic distress.

Standard and Poor reported 100 unfavorable dividend changes in February 2023.

About the Data

We previously did the legwork for compiling the Great Depression era's unfavorable dividend changes using contemporary newspaper reports published between January 1929 and January 1937 that featured the Standard Statistics Company's data. We thank Howard Silverblatt for providing Standard and Poor's archived data for unfavorable dividend changes from January 1955 through December 2003. Our source for unfavorable dividend data from January 2004 through the present is Standard and Poor's S&P Market Attributes Web File, which Howard and S&P's analytical team compile each month.

If you compare the Standard Statistics Company/Standard & Poor's data with that reported by B.C. Forbes in the 1920s and 1930s, the historic S&P data presents a more complete picture. It represents the dividend announcements of all publicly-traded firms in the U.S. stock market, while Forbes' data is based on a smaller subset of U.S. firms he regularly tracked.

References

Standard and Poor. S&P Market Attributes Web File. [Excel Spreadsheet]. 1 March 2023.

Image Credit: U.S. Library of Congress (Chronicling America). Real Napoleonic Financiering. National Tribune (Washington D.C.) Vol XXVII, No. 12, 1379, p. 1. [Online Database].

What does it take to quickly reverse an improving outlook for dividends?

As we learned last week, it takes the second largest bank failure in U.S. history combined with two additional bank seizures by federal regulators over a weekend. On top of that is a Federal Reserve that's set on fighting inflation by hiking interest rates again, never minding that their previous rate hikes directly contributed to the insolvency issues that caused the second largest bank failure in U.S. history.

How did all that affect the outlook for the dividends of the S&P 500 (Index: SPX)? According to the CME Group's S&P 500 Quarterly Dividend Index, the outcome has been negative across all future quarters through 2023.

Political Calculations is uniquely positioned to demonstrate how negative because we can build off the animated chart we recently featured that illustrated how much the outlook for dividends had improved since the end of 2022 through mid-February 2023. Our new animated chart cycles through the days from 15 February 2023 through 17 March 2023. As you'll see, there's not much negative movement until we get past the halfway point, with the most evaporation happening during the final week of the animation.

The chart shows the expected dividends for the upcoming third and fourth quarters of 2023 have dropped below the levels recorded for the same quarters in 2022. Investors have quickly become far more gloomy than they had been before the bank failures and the Biden administration's response to them.

That's also gloomier than what they expected at the end of 2022, as the rapid negative change in expectations for future dividends during these quarters has more than offset the improvement they recorded earlier in 2023.

More About Dividend Futures Data

The dividend futures data we visualized in the animated chart is based on our records of the S&P 500's Quarterly Dividend Index Futures reported by the CME Group going into each trading day from 15 February through 17 March 2023.

Dividend futures indicate the amount of dividends per share to be paid out over the period covered by each quarters dividend futures contracts, which start on the day after the preceding quarter's dividend futures contracts expire and end on the third Friday of the month ending the indicated quarter. So for example, as determined by dividend futures contracts, the quarter of 2023-Q1 began on Saturday, 17 December 2022 and ended on Friday, 17 March 2023.

That makes these figures different from the quarterly dividends per share figures reported by Standard and Poor. S&P reports the amount of dividends per share paid out during regular calendar quarters after the end of each quarter. This term mismatch accounts for the differences in dividends reported by both sources, with the biggest differences between the two typically seen in the first and fourth quarters of each year.

Because we're not mixing S&P's data with the CME Group's dividend futures data, the animated chart is providing an apples-to-apples comparison for the different snapshots in time of investor expectations.

Image credit: Photo by Emil Kalibradov on Unsplash.