Nvidia’s blowout earnings report … mortgage rates top 7% again … how Luke Lango is playing it … how a cost-of-living adjustment can make all the difference in your portfolio
As I write Thursday afternoon, the Nasdaq is up approaching 2%.
It’s climbing on the back of a monster earnings beat from semiconductor company Nvidia, which is rocketing nearly 27% higher.
Yesterday, after the market closed, Nvidia reported earnings that crushed expectations. Better still, it provided forward-looking guidance that was jaw-dropping in its bullishness.
What’s behind the operational outperformance?
Artificial Intelligence (AI).
From Jensen Huang, founder and CEO of NVIDIA:
The computer industry is going through two simultaneous transitions — accelerated computing and generative AI.
A trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process.
Now, two things can be true at once…
One, AI is going to be huge, and select stocks like Nvidia will make their shareholders a fortune from it.
Two, we’re watching a mini “AI bubble” form, and investors need to be very careful.
We’ve touched on both these points in prior Digests, and we’ll circle back to them in the future. For now, just remember that virtually all of the market’s gains this year have come from AI-based stocks. This is a whopper of a FOMO (fear of missing out) trend.
The challenge looking forward is sifting the market to find the companies that will be true AI-leaders, versus the many AI-imposters.
As for Nvidia, it’s up more than 165% on the year. If you’re an investor, congrats, and enjoy the day.
Shifting gears, the average rate on a traditional 30-year fixed mortgage is back above 7%
The higher interest rate continues to fuel the dynamic we’ve detailed in recent Digests wherein new homes sales are rising, while existing home sales drop.
This is because existing homeowners, sitting on dirt-cheap mortgage rates from a few years ago, have zero interest in selling in this market. So, with very little existing-home inventory available, would-be homeowners have little option but to turn to newly-constructed homes.
The numbers here are striking.
According to the National Association of Realtors, in April, existing home sales decreased 3.4%, with all four major U.S. regions registering month-over-month and year-over-year declines. The inventory of existing homes on the market remains 44% below pre-pandemic levels.
But new home sales? In April, they jumped to a 13-month high according to the Commerce Department.
Although certain cities are reporting significant upticks in new home construction, on the whole, limited inventory relative to demand remains a problem. So, if you’re a would-be home-buyer on the sidelines, you should probably get used to waiting.
From Real Trends:
The big takeaway here is that there are no signs anywhere in the data that we have any surge of inventory coming.
It’s much more likely that the supply of homes in 2023 stays closer to the COVID-19 pandemic lows. We have a shortage of homes available to buy in this country.
In the absence of meaningful new supply hitting the market, there’s a limit to how much home prices can drop.
Meanwhile, don’t look for any substantial relief on the mortgage front
Though not directly tied to mortgage rates, the Fed Funds rate heavily influences mortgage rates. And as you know, the Fed Funds rate has been soaring in recent months.
As we’ve been tracking in the Digest, we’re likely to see the Fed pause rate-hikes in June (the latest Fed buzzword is a “skip” not a “pause”). While that will be welcomed, clearly, a pause/skip isn’t a cut. And without a cut, we shouldn’t expect any meaningful declines in mortgage rates.
But what about the rest of the year?
That’s where we get into major disagreement.
While Federal Reserve Chairman Jerome Powell and the various Fed presidents have all toed the line in saying there will be zero rates cuts this year, Wall Street puts the odds of cuts by December at almost 60%.
Interestingly, this percentage has dropped from 99.9% only a handful of weeks ago. Wall Street is begrudgingly arriving at the takeaway that the Fed isn’t as dovish as hoped.
The latest example of this came on Monday when St. Louis Fed President James Bullard said he wants more rate hikes this year.
St. Louis Fed President James Bullard on Monday said he would like to see two more quarter-percentage-point interest-rate hikes this year.
“I think we’re going to have to grind higher with the policy rate in order to put downward pressure on inflation,” Bullard said.
If this happens, get ready for higher mortgage rates, resulting in even less housing affordability.
By the way, if you want to buy a home and you’re trying to make the numbers work, remember the old rule of thumb: You don’t want to spend more than 30% of your income (before taxes) on your all-in housing costs. This includes not just your mortgage, but your property taxes, private mortgage insurance, and any HOA fees.
If you can’t afford a home, certain housing and homebuilding stocks could help you get there
Regular Digest readers know that we’re up nicely in our trade on the iShares Home Construction ETF, ITB. It holds many homebuilding heavyweights including D.R. Horton, Lennar, PulteGroup, Home Depot, Toll Brothers, Sherwin-Williams, and Lowe’s.
But ITB isn’t the only way to play the housing market today.
Let’s jump to our hypergrowth expert Luke Lango:
We’re seeing some mind-boggling rallies in the housing sector right now!
Digital brokerage firm Compass is up 70% this year. iBuying leader Opendoor has rattled off a 104% gain in 2023, while digital listings firm Redfin is up almost 150%.
Lots of housing tech stocks are already up more than 100% this year. We think those same stocks can rally another 100% into the end of the year.
Luke then zeroes in on home-builders in particular, citing the NAHB Homebuilders Confidence Index that jumped to 50 in April. That was the fifth consecutive month of rebounding confidence, as well as the first expansion reading (50 or greater) since mid-2022.
Back to Luke:
As you can see in the chart below, critical housing market inflection points are marked by crosses above and below this level.
When confidence drops below 50, it marks the start of a cyclical housing bear market. When confidence pops back up above 50, it marks the start of a cyclical housing bull market.
We just crossed back above 50.
History says this is not a head fake but, rather, the start of a new multi-year cyclical bull market in housing.
For more of the ways Luke is playing the housing market as an Innovation Investor subscriber, click here.
Overall, while Luke’s analysis isn’t good news for would-be homebuyers hoping for lower prices, it’s great news for investors looking to growth their wealth from certain homebuilding stocks.
We’ll continue tracking this for you.
Let’s round out today’s Digest on a “personal finance” note
Clearly, what unites us all here in the Digest is investing.
But unless you’re planning to invest with borrowed dollars (very risky), you need to live below your means to save money so that you’re able to invest.
Well, yesterday, a survey from LendingClub reported that 49% of individuals earning more than six figures are now living paycheck to paycheck. That’s a substantial jump from last year’s number of 42%.
Clearly, living paycheck-to-paycheck doesn’t allow for systematic monthly investing.
If you find yourself in this position, how can you create financial margin to continue funding your portfolio?
Well, coming full circle in today’s Digest , lower your housing costs. And the best way to do that is by moving.
Yes, mortgage rates are nosebleed-high if you move and buy a new home in a different city, but depending on where you go, the cost-of-living differential could more than offset those expenses.
On this note, let’s jump to Bloomberg:
Americans living in big cities are more likely to be financially strained than their suburban counterparts, according to a survey.
Nearly 70% of urban dwellers were living paycheck to paycheck last month, compared with 55% of suburbanites…
“While income is obviously a major factor, where you live appears to be almost equally important in factoring whether a consumer is living paycheck to paycheck,” said Anuj Nayar, financial health officer at LendingClub.
To illustrate, let’s turn to a different study, this one from Smart Asset. It analyzed how far a $100,000 salary would take you when living in different cities.
While we all know that your dollars don’t go as far in places like New York or Los Angeles, the exact amount is jaw-dropping.
From Smart Asset:
Memphis’ low cost of living surely won’t make you sing [the blues]. A $100,000 salary is worth more here ($86,444) than in any other city in our study after subtracting taxes and adjusting for the cost of living…
[Meanwhile], in New York City, $100K amounts to just $35,791 when you consider taxes and the cost of living.
Think about that – moving from New York to Memphis is almost the equivalent of getting a 150% raise in terms of your cost-of-living purchasing power.
What would happen if you moved from New York, yet adopted a humble standard of living in Memphis enabling you to save and invest the approximate $50,000 differential in cost of living?
Let’s assume you’ll add $50,000 a year to your nest egg, growing it at the S&P’s long-term average rate of return of 6.3%.
After 20 years of $50k payments compounded annually, your nest egg clocks in at $1,899,711.
Is moving out of the picture? Okay, well, could you start a side hustle?
If you’re able to invest, say, $20,000 a year for 20 years, compounded at the S&P’s long-term rate of return, that side gig will put more than $750,000 in your wallet.
Now, tying this entire Digest together, think about the size of your future nest egg if you invest this money in a high-flying AI stock like Nvidia. That’s how you retire early.
Just a reminder that smart investing begins with smart money management.
Have a good evening,