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Stocks are set to slump and many Americans are “prisoners in their own homes,” David Rosenberg says.
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Sky-high asset prices are likely to drop if the Fed marches on with interest-rate hikes, he says.
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Rising rates have driven up mortgage costs, deterring many sellers, the economist says.
Stocks are poised to tumble as economic pressures mount, and the historic surge in mortgage rates means many Americans are now “prisoners in their own homes,” David Rosenberg says.
“The bond market has clearly paid a price,” he said in a Monday memo, referring to bond prices slumping in recent months as yields surged. “Round two of the drawdown in the equity market is set to follow. Cash is king.”
The Rosenberg Research president laid out several reasons why he believes asset prices have soared to unsustainable highs. He blamed pandemic fears and excessive government stimulus for fueling carefree spending by consumers, and said enhanced unemployment benefits have driven up wages and encouraged companies to hoard workers.
Rosenberg warned that labor-market stickiness could prevent the unemployment rate from rising enough to assuage the Federal Reserve’s concerns that the inflation threat isn’t over and the economy is overheated. The central bank might keep forging ahead with further hikes to interest rates as a result, turning the screw on the stock market and the economy, he said.
The former chief North American economist at Merrill Lynch also raised concerns about the housing market. He underlined the Fed’s decision to cut interest rates to almost zero in 2020 and 2021, which allowed homeowners to lock in long-term mortgages at rates of 2% to 3%.
“Fully 85% of mortgagors did so and while this enabled them to escape the impact of higher interest charges as the Fed tightened, these folks ended up becoming prisoners in their own homes,” he said. “They can’t move without a serious financial penalty.”
Rosenberg meant that potential home sellers have balked at parting with their dirt-cheap mortgages, and having to pay top dollar and take on a 7%-plus mortgage for a new place.
The resulting dearth of existing houses for sale has led to a “bubble in home prices that exceeded what we saw in 2005-07,” he said.
The veteran economist doubled down on his bearish outlook for stocks in a morning research note on Tuesday. He highlighted that two S&P 500 sectors which have been powering the benchmark index this year, consumer discretionary and IT, are on track for their worst month since December. He also cited declining trading volumes on the New York Stock Exchange and Nasdaq.
Rosenberg listed several reasons to worry about the economy too. They included soaring rates of credit-card delinquency, mounting evidence of weakness in output and the labor market, higher gas prices, tighter bank lending, and the looming resumption of student-debt payments. Moreover, he raised the prospect of another government shutdown in October, and underlined the painful impact that could have on economic growth.
The markets guru has been ringing the alarm on a bleak investing backdrop for a while. In July, he compared the speculative mania around stocks to the dot-com and housing bubbles, and warned Americans were close to exhausting their savings and struggling more and more to borrow money.
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