With my parents coming into town last night and Monday being Pioneer Day, I am trying to stretch this upcoming weekend into a four day celebration by working extra hard today. Hence the early delivery of this week’s commentary.
Stock indices hit more all-time-highs yesterday, and yet, interest rates haven’t seemed to notice. Typically, interest rates rise with the stock market. But the more the free market relies on sovereign intervention as normalcy, the more that pattern is disrupted, making it increasingly difficult to forecast with any degree of accuracy the future of interest rates.
That challenge is not localized to my tiny office either; faced with the challenge to liquidate $4 trillion in marketable securities, even the Federal Reserve Banks seem to be scratching their heads as to how and when to pull the drain plug. It could be as early as September, but it might not be? Across the pond, the European Central Bank President is facing similar circumstances. Mr. Draghi commented this morning that in spite of a strengthening economy, prices have flat-lined, requiring a continuing period of “highly accomodative” interest rates. So for now, we consumers continue to benefit from cheap financing.
Happy Pioneer Day!
Here is a breakdown of the sectors producing our $192B trade deficit. As a country, we are purchasing more than we are producing. I honestly don’t understand all of the implications to our country, but I do understand what happens to a family when you spend more than you make, and the repercussions are disastrous.
Looking at the financial markets, the large majority of investors are of the opinion that the stock market will continue to go up, while a slim minority believe that they are overbought and ready for a decline. Fundamentally, if most investors have their money already in a particular market, that doesn’t leave much capital available to drive prices higher; consequently, prices will stagnate. That’s what’s happened with the stock market rally and all the excitement over the DOW reaching 20,000. There is no more momentum to drive prices higher because is no more money shifting into stocks. Should enough people get nervous and look to protect their stock-heavy portfolio, the market will correct and a lot of money will come out of stocks and into bonds, lowering the collective price of stocks and driving interest rates back down as bonds are scooped up for their perceived safety. I’m not saying that it’s going to happen, but there appears to be a possibility. And possibilities are what dreams are made of–in my case, that’s low rates. Plus, I want to buy me one of those foreign-made cars. 🙂
I am home with my wife, who is recovering from surgery this week, and it’s tough to want to write about the financial markets. But when the DOW trades above 20,000 for the first time ever, it’s worth a word or two. Typically after the DOW has hit *000 levels over the last 40 years, the index has risen higher, more quickly, than just before the thousand-level was broken. This will pull money out of other assets, like bonds, as traders seek to join the throngs cashing in on the bullish move. That rush to ride the bull wave will take its toll on rates. Watch for in increase over the next week. That’s my prediction.
It’s election day. And though we don’t actually put a piece of paper into a box anymore, as this finely manicured man-hand is demonstrating, it’s an important right as citizens of the best country in the world. I don’t do politicis so much, but I do vote. Word around the the political/market circles is that if Ms. Clinton conquers, stocks will rally as a result of continued congestion in Washington. Should Mr. Trump triumph, stocks would suffer and bonds would rally due to unsurpassed upcoming uncertainty. Nobody is even consudering a victory for the other dozen or so names on the presidential ballot today.
This is the moment that we have all been waiting all year for. Drumroll please…
I generally don’t put a lot of stock into revisions of previously published data. One of the reasons is that there is so much new information being released every day that it’s impossible to keep up while still trying to make this column mildly interesting, and the second is that with a number like GDP, it’s impossible to be absolutely accurate–even after a half dozen updates. Today’s second reading of the second quarter Gross Domestic Product came in at 3.7 though, which is significantly higher than the first reading of 2.3, and is cause for alarm among the Chicken Littles who claim that not only the sky, but the bottom as well is falling. I am not saying that it is or isn’t, just that the surge in growth proclaimed by the above graph is affecting the markets. Today, the jovial atmosphere is pushing the prices of both stocks and bonds upward.
The Labor Department reported that there were 295,000 new (non-agricultural) jobs created last month, 19% more than the number that the markets expected. Additionally, the Unemployment Rate slid down to a six-year low 5.5%. The U6 (which measures total unemployment) dropped 0.3% to 11%. Moreover, those 94.5% (or 89% depending on how you look at it) of the population who are gainfully employed saw an average of 0.1% higher earnings last month.
Consequently, Stocks and Bonds are getting pounded this morning. Stocks see the likelihood of higher interest rates and the toll that could take on leveraged corporate earnings, and Bonds–well, the price of low yielding bonds plummets at the prospect of higher yielding bonds right?
Like the photo of the above sign, some things are obvious. If you have been holding out for a lower rate, the sidewalk is coming to an end. Take the savings that you can now realize and stop worrying about it :). I’ll make it easy for you.
Home prices across the nation rose 5.5% November to November according to CoreLogic, who also forecasts a 4.6% appreciation rate in the year ahead. Including distressed sales, home prices in Utah are still 11.0% under their peak 2007 value (9.1% excluding distressed sales).
The DOW is down another 100 points this morning after yesterday’s 300 point slide. It would seem that this new year is bringing with it concern over just how robust our economy actually is. Low oil prices and a new congress are just not as inspiring as they used to be.
Mortgage Bond pricing is bumping up against resistance not seen since March of 2013. If we can get through this threshold, interest rates could drop another 1/2%…
Stock prices are lower after the S&P (2039) and the Dow (17614) closed at record levels yesterday. The S&P marked its 40th new closing high for the year (versus 45 in 2013) and is up 9.5% from that six-month low just a month ago.
Speaking of buying low; wholesalers are amassing larger inventories than have been deemed prudent by analysts. So it you want to gamble a little, you might find last-minute deals this Christmas if Retail Sales don’t also beat expectations.
In the meantime, pricing of both Stocks and Bonds is down marginally.
I chose this picture of Grizzly Adams as a representation of current market conditions for three reasons: 1. It was my favorite show (besides Dukes of Hazzard) when I was a kid. 2. My 12 year old son just did a report on the real James “Grizzly” Adams for 7th his Grade U.S. History class. 3. It seemed more workplace appropriate than a photo of a doped-up crack head. The metaphor of the crack head could have been used because A: the markets also make decisions based on irrational fears and B: the markets currently “need” low interest rates to get through the day. As a continuation and clarification of my commentary yesterday, I want to reiterate that we are not in a “normal” market. In a normal market, good news (whether economic or political in nature) leads to higher stock prices and higher interest rates, while bad news leads to lower stock prices and lower interest rates. Mortgage Bonds have seen reduced yields this last week as stock prices have plummeted over the anticipation of rising rates cutting into profitability. Thirty year rates for FHA are at 3.25% and conforming conventional loans are at 3.875% today, while 15 year rates are down at 3.0%. (APR will be higher, depending on the amortization term, and the loan and down payment amounts–as closing costs and the presence of mortgage insurance affect each loan differently).
We will need to wait until October to see how selling $3B in iPhone 6 on just the first day of availability sways the numbers; today though, August’s Durable Goods Orders (purchases of wares that are expected to last at least a year) took a record plunge of 18.2%. Getting “sold on the sizzle” of decreased sales, traders have pulled their positions causing the DOW to plummet over 200 points so far this morning. I anticipate that in a few hours investors will remember that July’s Durable Goods Orders were UP a record 22.5% as a result of ginormously expensive aircraft contracts, making today’s decline in reality an increase of 4% from June. So don’t go cashing in your 401(k) just yet.
Up against a ceiling of resistance, Mortgage Bonds are flat, so all of the funds from the sale of equities are going into cash accounts. Translation: it’s a good day to lock in the interest rate on your loan if you haven’t already done so.