Fed tightening already hurting housing & auto sales

After eight interest rate hikes from the Federal Reserve, there are signs of slowing in housing and autos. New home sales slid 5.5% in September to their lowest level since December 2016. Sales are down 13.2 Y/Y amid pressure from expensive home prices and rising mortgage rates. New permits have also tumbled in recent months, a worrisome sign for the housing market. Prices have been on the decline with rising rates, and this has led to an increase in inventories that sit at 7.1 months to clear the current supply. Auto sales surprisingly crept higher in October to their highest seasonally-adjusted annual rate in 2018 of 17.59 million. Sales have declined from record 2017 levels and the combination of higher interest rates and tariffs should lead to a further slowdown moving forward.

Q3 earnings growth +25%, but beware of 2019 comps!

Through 75% of the third quarter earnings season, the blended growth rate for the S&P 500 has been 24.9%, well above the 19.3% estimate at the start of the quarter. 78% of companies have beaten EPS expectations while 61% have topped revenue forecasts. Revenues have grown 8.5% in Q3, also ahead of the 7.8% estimate. The combination of strong earnings growth and the October selloff have brought valuations to more reasonable levels. The S&P 500 is now trading at a forward P/E multiple of 15.6x which is below the five-year average, but above longer-term figures. Earnings are expected to grow 15% in Q4, 21% for full year 2018 and 9.4% in 2019. Earnings are not quite at peak levels, but comparisons are becoming more difficult.

The backdrop for MLPs looks very promising

MLPs fell 8% in October, but they are flat YTD after struggling to start the year. The correlation between the price of oil and MLPs has been high in recent years, but the asset class has not followed the price of oil higher in 2018. It appears as if the correlation is strongest when oil prices are falling like they have done in Q3. Pipeline companies tend to provide stable cash flows, solid distribution growth and attractive yields. Pipeline distribution growth is projected to be around 6% over the next year and this has improved over the past few years as the asset class has undergone a reset to focus on financing growth through internal means as opposed to constantly having to tap capital markets. Valuations remain below historical averages based on almost all metrics and nearly $130B of capital is required to complete pipeline infrastructure projects through 2020.

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*As of 2/28/20