When you think about it, ultra-low interest rates can be credited with a wide variety of recent occurrences. Real estate became more accessible. Vehicles became more affordable. And higher-yielding stocks and bonds became unavoidable for those who required a return on their life’s savings; that is, CDs and treasuries were not able to provide retirees with a risk-free income stream any longer.
Yet the Fed’s interest rate manipulation via quantitative easing (QE) may soon be getting into a scrape with the law of diminishing returns. For example, the headlines have heralded double-digit percentage gains for the prices on single-family residences. However, this ignores the reality that one-third of the properties have been scooped up by investment companies. Similarly, the headline housing starts number for March focuses upon the one million new properties in the pipeline. However, the housing starts break out into a year-over-year increase of 27% for multi-family (5-unit) buildings and -4.8% for single-family homes. In other words, less single-family homes are being constructed and less will be owned by families; the trend toward renting a 4-bedroom in a particular neighborhood appears to be taking root.
One might be inclined to think that home-builders would still be immensely profitable. After all, wouldn’t the decline in single family residences be offset by the huge increase in multi-family units? However, investors in iShares DJ Home Construction (ITB) and SPDR Homebuilders (XHB) are rethinking the premise. Both exchange-traded funds are well below respective 50-day moving averages.
Is it possible that some of the best performers in 2012 — CARZ, ITB, XHB — are merely taking a breather? Maybe investors have been locking in profits in light of the current “soft patch” in the global economic data. Perhaps. Nevertheless, relative weakness is showing up in brokerages as well.
One might expect retail brokerages (e.g., TD Ameritrade, Schwab, E-Trade Financial, etc.) to dance the salsa with ultra-low interest rates propelling stock prices to record highs. Unfortunately, recent indications at retail institutions have shown weakness in trading volume; weak trading activity can hinder profitability and revenue gains. And while the remarkable start to the 2013 year gave iShares DJ Broker Dealer (IAI) a solid shot in the arm, the trend has clearly shifted toward greater caution.
In sum, the ETFs that have benefited the most from ultra-low interest rates have been buckling. Granted, the central banks have made it very difficult for anyone — consumers, small businesses, large corporations, individual investors — to ignore ultra-low interest rates. What’s more, investors may not feel like they have viable alternatives than to put money to work in high-yield and/or stocks. That said, there is ample evidence to warrant vigilance as well as some sideline cash for a future buying opportunity.