Fed's Easy Money Pumps Up Winners Like Apple and Housing
August 27 2020 - 11:48AM
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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