Stock averages overall are still positive for the year, despite an unprecedented crunch in U.S. credit markets. But those averages are masking massive declines in the parts of the economy most directly connected to the housing market, creating uncertainty about the months ahead.
With the help of CapitaI IQ, a division of Standard & Poors, The Denver Post looked at the performance of companies in the four industries most impacted by the housing downturn.
Through Monday, the shares of homebuilders in the S&P 500 have lost nearly two-thirds of their value over the past 12 months. Thrifts and mortgage lenders are down by 57 percent, with almost all of that decline coming since July 19, when a credit crunch made mortgage loans more difficult to obtain.
Regional banks are increasingly taking a hit, off 27 percent, and consumer-finance companies are down by 19 percent. By contrast, the S&P 500 was up 1.8 percent over that same period.
“This reminds me of the first six months of the first round of the ugly phase of the Internet bust. There was a sell-off, a false rally, then a deeper sell-off,” said Fred Dickson, chief market strategist for D.A. Davidson & Co. in Great Falls, Mont.
He said what makes this market decline even more dangerous than the one in 2000 is that the two greatest reservoirs of household wealth, home values and stock portfolios, are being drained at the same time.
Dickson has tracked the performance of U.S. stocks since July against the most highly-rated subprime mortgage bonds and found they track closely.
The top tier of subprime bonds were trading at about 100 percent of their value in July and fell about 10 percent during the credit crunch.
When the Federal Reserve made a surprise cut in interest rates in mid-August, those bonds rallied to 95 percent of their value. Stock values also rose, with the Dow Jones industrial average setting new highs in early October.
Since then, the top tier of subprime bonds are down 35 percent, and the S&P 500 crossed into a correction as of Monday, defined as a 10 percent decline from the peak.
With the financial sector breached, the next wall investors are hoping will hold is retail, which will face a severe test this holiday season.
“The impact has been on the housing market, banks and financial institutions,” said John Claxton, a vice president with RBC Dain Rauscher in Denver. “Now we are trying to figure about how much impact it will have on retail.”
If consumers continue to spend despite the credit crunch, and if employment holds strong, then the economy could avoid a significant slowdown, Claxton predicts.
Dickson is more pessimistic. The damage to the financial system will make it harder for consumers to obtain credit and maintain spending.
“Investors realize for an economy to continue to grow, you need to have a very healthy and liquid banking system making credit available broadly and widely,” Dickson said.
Subprime borrowers, in particular, are between a rock and a hard place, with more than 400,000 subprime loans expected to jump to higher payments each quarter next year. Refinancing opportunities have evaporated.
Businesses also are making crucial decisions now about their expansion plans for next year. If they contract spending, then a broad range of industries that have kept the market above water could start sinking, Dickson said.
“That will spill over to your broader industrial companies that are involved in equipment, construction, engineering projects,” Dickson said. “We are starting to see a little bit of this spillover into technology sectors.”
Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com
