Financial Review

In Need of Pie

…Stocks stumble into holiday. Economic data dump: existing home sales, housing starts tick up, consumer sentiment falls, durable goods orders sink, LEI ticks up. Oil bounces. Wrapping up USMCA.

Financial Review by Sinclair Noe for 11-21-2018

DOW – 0.95 = 24,464
SPX + 8 = 2649
NAS + 63 = 6972
RUT + 19 = 1488
10 Y + .01 = 3.06%
OIL + 1.02 = 54.45
GOLD + 4.30 = 1226.40


Stocks bounced, a little, not enough. Stocks were in positive territory for most of the session but closed at lows for the session. The S&P 500’s plunge on Tuesday left the broad index staring at a 9.1% deficit on the quarter. That marks the S&P 500’s worst start to a fourth quarter through 37 trading days since 2008. Thankfully, the current slump is nowhere near as serious as the 35% meltdown from a decade ago. The bad news is that the S&P 500 has only started the fourth quarter this horribly five other times in history. And those years are all infamous. Besides 2008, these years include the Great Depression (1929, 1932 and 1937) as well as 1987 during the Black Monday crash. And the 7th worst start to the fourth quarter occurred during the oil embargo and bear market of 1973. In other words, the bull market is in less-than-ideal company. All of those years coincided with recessions, other than 1987.


Tech stocks have featured prominently in recent equity weakness. The “FAANG” trade, has been under pressure recently. Through Tuesday’s close, the FAANG stocks were all down more than 20 percent from their 52-week highs, officially in a bear market. The sharp decline in tech helped send the Dow, S&P 500 and Nasdaq all down at least 3 percent for the week.


The National Association of Realtors reports existing-home sales ran at a seasonally adjusted annual rate of 5.22 million in October. That was up 1.4% for the month, marking the first monthly increase in six months. Still, October’s rate of sales was 5.1% lower than a year ago. The median sales price in October was $255,400, up 3.8% versus a year ago, one of the lowest yearly increases in a long time. Homes stayed on the market an average of 33 days in October, and first-time buyers made up 31% of all purchases, still below the long-term average of 40%. At the current pace of sales, it would take 4.3 months to exhaust available supply, a tick lower than the 4.4 months’ worth of unsold inventory notched last month. For some context, the long-term average that’s considered a sign of a “balanced” market is six months’ worth of inventory; in February, there were 3.4 months’ worth of unsold homes. With so much demand, it’s not clear that any easing of the supply crunch won’t be met with a massive wave of buying that could even push prices to reaccelerate.


The 30-year fixed-rate mortgage averaged 4.81% in the November 21 week, down 13 basis points, mortgage liquidity provider Freddie Mac said Wednesday. That’s the biggest weekly decline since January 2015 and the lowest level for the popular product since early October. The 15-year fixed-rate mortgage averaged 4.24%, down 12 basis points during the week. The 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 4.09%, down from 4.15%.


Housing starts ticked up 1.5% to a seasonally adjusted annual rate of 1.228 million in October. That was 2.9% lower than a year ago, however. Permits ran at a seasonally adjusted annual 1.263 million pace during the month, 0.6% lower than in September and 6% lower than year-ago levels. Builders broke ground on more homes in October, but they applied for fewer permits to start work in the future, another reminder that housing market activity is still moving in fits and starts. With rising mortgage rates and increases in house prices that continue to outstrip disposable income, housing affordability has dropped notably since peaking in 2012. But housing remains relatively affordable on a historic basis and the decline in affordability does not seem to fully explain the slowdown. Further, high prices should lead to increases in housing starts, but that has not occurred. Look for housing to remain weak through the first half of 2019.


The University of Michigan’s consumer-sentiment index fell to 97.5 in November from 98.6, according to the second and final reading for the month. It’s the second straight decline and a bit more negative than the preliminary reading of 98.3. Most Americans are still optimistic about the economy, but a recent slide in the stock market has made wealthier households more anxious about their incomes. The biggest decline in sentiment occurred among the richest one-third of U.S. households.


Orders for American-made durable goods sank in October, but it was mostly due to a dropoff in demand for airplanes of all types. More notably, business investment was weak for the third month in a row. Orders fell 4.4% to mark the biggest decline in 15 months. Bookings for commercial jets slid 21.4% and they shrank 59% for fighter jets and other military aircraft. Stripping out planes and cars, orders rose a slight 0.1%. Transportation often exaggerates the ups and downs in orders because of lumpy demand from one month to the next. Aside from aircraft, orders also declined for machinery and primary metals. Orders rose for computers, networking gear and electrical equipment. The biggest takeaway from the October report was another soft reading on business investment. Core orders fell slightly last month following small declines in September and August.


Sluggish business spending on equipment together with a lackluster housing market could stoke fears that higher interest rates are hurting the economy. The economy may have seen its best day already for growth and prosperity back a couple of months ago in late summer. Winter is coming for the economic outlook where business investment spending looks to be topping out, and companies have let a few workers go.


The number of Americans who applied for unemployment benefits in the week before Thanksgiving rose to the highest level in 4½ months. Initial jobless claims, a rough way to measure layoffs, rose by 3,000 to 224,000 in the seven days ended Nov. 17. New jobless claims hit the highest level since June 30 and broke a string of 18 straight weeks below 220,000.


The U.S. economy remains on a growth path, according to an index that measures the nation’s economic health, though the country’s expansion is likely to moderate. The leading economic index rose 0.1% in October after 0.6% and 0.5% gains in the prior two months. The LEI is a weighted gauge of 10 indicators designed to signal business-cycle peaks and valleys. The index still points to robust economic growth in early 2019, but the rapid pace of growth may already have peaked. While near-term economic growth should remain strong, longer-term growth is likely to moderate to about 2.5% by mid- to late 2019. Five of the 10 components of the LEI showed expansion in October, with the biggest positive contribution coming from average consumer expectations for business conditions. The biggest negative contributors were stock prices, average weekly initial claims for unemployment insurance and building permits.


Oil prices rose about $1 a barrel a barrel, bouncing from the lowest levels in months, after U.S. government data showed strong demand for refined fuel, but concerns remained over rising global crude supply. The Energy Information Administration said U.S. crude stocks rose 4.9 million barrels last week, a larger-than-expected increase. Crude inventories have risen for nine straight weeks, the longest streak since March 2017. Crude stocks at the Cushing hub dropped; as did gasoline stocks.


Lifted by the shale oil boom, the United States recently overtook Russia and Saudi Arabia to become the world’s largest oil producer for the first time since 1973.The International Energy Agency predicts US output will have soared by more than 2 million barrels per day in 2018. It’s expected to climb further next year. No other country has ramped up production to that degree. The fear among oil traders is that the world may not need all that American shale coming to market. The overall market remained weak after crude fell more than 6 percent the previous session, while world equities tumbled on worries about economic prospects. Worried by the prospect of a new supply glut, the Organization of the Petroleum Exporting Countries is talking about reducing output just months after increasing production. OPEC, Russia and other producers are considering a supply cut of between 1 million barrels per day at a Dec. 6 meeting. However, Saudi Arabia may find it harder to act to support prices after Trump praised Saudi Arabia for helping to lower oil prices, and gave crown prince Salman a pass on charges he ordered the assassination of journalist Jamal Khashoggi.


Twelve Republican Senators are calling on Trump to submit the deal to update the North American Free Trade Agreement to Congress for passage by year-end, before Democrats assume control of the House of Representatives. The new U.S.-Canada-Mexico Agreement, forged in September and intended as an update to the decades-old NAFTA, is due for signing by the three governments around Nov. 30. That leaves little time for a vote to occur before a newly-elected Congress takes office in January, with Democrats in control of the House of Representatives after elections earlier this month. Some Democrats have said they would demand stronger enforcement of new labor and environmental standards in the USMCA agreement. The letter from the Republican senators argued that it was still possible for the current, Republican-led Congress to consider and vote on the USMCA deal if the White House submits a final text of the agreement before Nov. 30 and invokes a fast-track provision allowed under trade priority rules.


Retailers such as Walmart and Target have been pouring money into their online businesses to fend off rival Amazon as the companies look to capture an even greater share of U.S. e-commerce sales. While Amazon’s reported sales growth each quarter includes that taken in from its other businesses, such as Amazon Web Services, the company is expected to capture nearly 5 percent of total U.S. retail sales by the end of this year; that works out to about 48 percent of e-commerce sales in the US, or $252 billion.



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