In a holiday-shortened week, there is plenty of data. The Case-Shiller home-price index will set the tone on Tuesday morning. After last week’s soft housing reports, many will be asking, Will housing weakness undermine economic growth?
Prior Theme Recap
Last week I expected a focus on bonds versus stocks. It was a light week for data and the bond market rally was an ongoing mystery. That theme was as good as any, but nothing really stood out. The appetite for content created many “fluff” pieces and trading was very quiet.
As long as you did not take small moves seriously, there was an opportunity to do some buying at mid-week.
Forecasting the theme is an exercise in planning and being prepared. Readers are invited to play along with the “theme forecast.” I spend a lot of time on it each week. It helps to prepare your game plan for the week ahead, and it is not as easy as you might think.
Naturally we would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.
This Week’s Theme
Has the housing recovery stalled out? If so, what does it mean for the economy?
Here are some perspectives:
- Housing is a leading component. It is not responding to interest rates as expected, and those good times may be ending. (New Deal Democrat).
- Nearly ten million Americans have underwater mortgages. These are concentrated in low-priced homes (30%). Some of the least expensive homes were purchased by investors and are now rental properties. This leads to poor prospects for entry-level buyers and also interferes with those wanting to “move up.” Many others lack real equity that allows them to trade up or trade to move to a new job. (Various accounts of the Zillow story. See Erin Carlyle of Forbes).
- Home affordability is challenging, especially given sluggish income growth. (MarketWatch).
- Big investors are betting against housing. Bill Miller disagrees. (MarketWatch).
- Expect sideways movement and gradual progress. (Calculated Risk).
It all seems pretty negative.
As usual, I have some thoughts that I will share in the conclusion. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.
Last Week’s Data
Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:
- The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
- It is better than expectations.
The Good
There was little news, but it was mostly good.
- Car sales are looking strong, up seven percent according to private research firms in a strong spring selling season.
- Forward earnings estimates rose for the sixth consecutive week. (Via Brian Gilmartin).
- Leading economic indicators rose 0.4%, beating expectations. Doug Short has a complete analysis. This chart (typical of his skill in bringing data to life) tells the story:
- Mortgage rates near a seven-month low. (Via Calculated Risk).
- New home sales beat expectations, but this is a noisy series. I am scoring this as “good” on the monthly improvement and the market reaction, but it is a close call. Calculated Risk that the first four months of 2014 are down 2.6% from last year. John Lounsbury and Steven Hansen reach a similar conclusion, after viewing the data in various ways.
The Bad
There was a little bad news as well.
- Immigration reform is stalled again. Nearly all of the economic studies show the benefit of more immigration and also reassure that immigrant labor is a complement to native-born workers. Via Brian Gilmartin is from a liberal source, but many conservative leaders (former Speaker Dennis Hastert, for example) take a similar position. This is one of many economic issues that has become politicized.
- Jobless claims increased by 28K, worse than expectations.
- Existing home sales missed growth expectations.
- Tensions between Russia and Ukraine remain high. Mark Mobius of Franklin Templeton Investments discusses the sanctions and the economic effects.
