The economy is disproportionately affecting lower-income households and higher-income households. The rich, as they say, are getting richer. Many of the not-so-rich, sadly, still need assistance.
Let’s face it — if you are reading this column, you are probably well-educated and successful. Most well-educated, successful people are also generous. Generosity is often directed by awareness.
I know it’s seemingly callous to consider the economic ramifications of homelessness or lower-income households on investor portfolios. But it’s the very kind of impact that I will continually address, both in this column in “numbers” as well as in my commitment to addressing the needs of the local community. In 2020, I increased my aggregate financial assistance to homeless shelters and housing assistance programs. In 2021, I began a collaboration with Construct. If the information in this column provides some awareness of what could be a challenging time for others, I humbly ask that you consider donating to this Great Barrington-based nonprofit or an organization close to you.
On Wednesday, May 5, 2021, federal judge Dabney Friedrich struck down the national eviction moratorium. This potentially leaves millions of Americans at risk of being forced to leave their homes.
The national eviction moratorium has been one of the reasons why home builders have been in high demand. When people aren’t allowed to stay in their homes, there is a need to find housing elsewhere.
I had planned on buying more of the iShares U.S. Home Construction ETF (symbol: ITB). (On November 16, 2020, I informed readers that I took a position in ITB). Upon hearing this news about the eviction moratorium, I took the evening to reconsider. Upon further inspection (yes, that’s a housing pun), I decided to move forward and add to the ITB allocation in my more aggressive portfolios.
Since I wrote the last Capital Ideas column, I’ve moved some of my Large-Cap Growth stocks into more cyclical and more neutral areas. In my more aggressive portfolios, I reduced my Invesco QQQ ETF (symbol: QQQ) by about 6-8 percentage points. Depending upon the portfolio, the proceeds were split to ITB, the SPDR Dow Jones Industrial Average ETF (symbol: DIA), and iShares Russell 2000 (symbol: IWM).
The news on the eviction moratorium surprised me. I admit that I don’t know much about this stuff. No one does. It’s rather unusual for the Centers for Disease Control and Prevention (CDC) to issue eviction moratoriums at all, much less under two consecutive presidential administrations — Trump and Biden.
The Department of Health and Human Services granted the CDC the legal authority to impose the moratorium. It did so under the Public Health Service Act of 1944, which gives the federal government power to handle health emergencies.
The federal judge reviewing the case is a Trump appointee. I figured she’d say that the Health Act would grant the legal authority to impose the eviction moratorium. I got it wrong, and I had to decide how to handle my ITB position.
The moratorium was extended in April 2021 and scheduled to end on June 30, 2021. I had assessed that the verdict was, in some ways, already priced in. That might seem obvious, but I had to go back to track how much anticipation there was that the moratorium might again be extended. If the political language favored fighting for another moratorium extension, that would mean an expectation of tighter housing inventory and the possible need for more construction. Despite the apparent need for an extension, the government has been so ineffective at allocating the billions of dollars of federal assistance that lawmakers don’t seem to have an appetite for an extension.
The federal government has approved two rounds of rental assistance (December 2020 and April 2021), totaling more than $46 billion. These funds can be used to pay back rent, next month’s rent, and some utility bills. The estimates of back rent are about $57.3 billion, according to joint research performed in January 2021 by Moody’s Analytics and the Urban Institute. The moratorium does not allow renters to avoid paying back rent. According to the Center on Budget and Policy Priorities, more than 1 in 7 renters have not caught up on rent during the pandemic (the ratio worsens to 1 in 5 for renters living with children). That’s an estimated 8.8 million Americans, according to the Consumer Financial Protection Bureau.
According to the White House, there were 1.55 million fewer evictions filed during 2020 than would have been expected due to the eviction moratorium. But that doesn’t mean checks have been effectively issued; it just means that people haven’t been evicted. The U.S. Treasury has done a good job allocating money to states. Still, it’s been a challenge getting the money into the hands of renters and landlords. This, I suspect, is one of the reasons why there hasn’t been a lot of political chatter about another extension.
It’s also worth noting that we don’t necessarily know what will happen next just because we now know Judge Friedrich’s decision. The Department of Justice will be appealing the decision. I’d be surprised if this changes the planned June 30 end date of the eviction moratorium. At the very least, the ban will remain in effect during the court battle. The court battle should make it more challenging to build upon the current 90-day extension. But, like I said, it doesn’t seem as if there was a big push to extend it anyhow. That’s a wash for homebuilder stocks. However, suppose the Justice Department overturns Judge Friedrich’s decision. In that case, the White House could feel encouraged to try and extend the moratorium. That could be a tailwind for homebuilder stocks.
The amount of new rental inventory due to the end of the eviction moratorium wouldn’t affect what was expected in terms of housing supply or rental alternatives. So, I felt comfortable adding to my ITB position. After a relatively good rally for the homebuilding stocks, you may be wondering if the sector is set to run out of steam. Perhaps. But perhaps everything is getting long in the tooth, as they say. However, I like the relative valuation of the homebuilder sector.
Below is an April 30, 2020 chart from FactSet. It compares the rolling forward price-to-earnings (P/E) S&P 1500 Index (comprised of the S&P 500, the S&P 400 Mid-Cap, and the S&P Small Cap 600 indices) to the index’s homebuilder’s industry group.
The homebuilders typically trade at a lower P/E than the index. Even after a rally, homebuilding stocks are still cheaper than they usually are on a relative basis. On April 30, 2021, the homebuilders traded at a forward P/E of 9.4, which was 44% of the S&P 1500’s forward P/E of 21.6. Through the last five years, the homebuilders have traded at an average forward P/E of 10.8, which was 60% of the S&P 1,500’s five-year average of 18.1. The price of homebuilder stocks could continue to rise and remain below where you’d expect them to be relative to the overall market.
The overall market is more expensive than usual. Still, based on valuations alone, aggressive investors who own stocks should consider holding homebuilders. (A quick note: Why do I say “aggressive” investors? If you own a well-diversified “moderate” portfolio, then you probably already own some of these stocks. I am talking about increasing the allocation of a specific cyclical sector. This is not a legal disclaimer, just an insight into what I consider to be a bit more aggressive.)
In my more moderate portfolios, I reduced my Large-Cap Growth Stock exposure by selling some iShares Russell 1000 Growth ETF (symbol: IWF) by about seven percentage points and used the proceeds to add to DIA and the Vanguard Dividend Appreciation ETF (symbol: VIG). Just like in the more aggressive portfolios, it’s my way to get more neutral.
To be clear, I am NOT giving up on growth stocks. In the long-term, I prefer Growth over neutral or Value. In particular, I like Technology stocks. I suspect that every company will become a tech company. That means I expect Tech stocks to outperform most non-tech stocks during the next decade. Any outperformance won’t be steady; the returns will happen in waves. I expect those waves to occur around corporate spending on cyber-security, 5G, artificial intelligence, contactless transactions, the cloud, logistics, SaaS, FinTech, etc. And let’s not forget the constant reinvention of companies and the industry disruptors we haven’t even heard of yet.
The shifts I made from Growth to neutrality may be temporary. There may be more. I’m not advocating for timing; I am advocating for re-balancing. Through appreciation and zealous buying, I have more of a Growth allocation than I want to at this time. I’m not chasing performance; I’m managing my risk.
For the long term, I feel I should be investing in Growth stocks in general and Technology specifically. You can’t time the bursts when those stocks might outperform the broader market, so I remain overweight in Growth. Just less so now.
This article originally appeared in The Berkshire Edge on May 17, 2021.