U.S. housing is “recovering,” but it is far from “recovered.” For April, existing home sales hit the highest annual rate since November 2009, and median prices reached their highest levels since August 2008. Both data points seem impressive, but the sales rate is still 30% below the peak, and prices need to climb another 20% before making new highs.
Existing home inventories are down more than 13% from a year ago, representing just a 5.2-month supply. Additionally, buyer traffic has increased 31% from a year ago. Despite all this seemingly good news, REITs got whacked for a nearly 2.5% loss in market action today. One reason is the failure to meet expectations. Even though existing home sales were up 0.6% in April, the expectation was for a much more robust 1.4% increase.
The 10-year Treasury yield climbed back above 2% today, and its recent rise has already put a damper on mortgage applications. In past cycles, signs of increasing mortgage rates often spurred surges in applications, as potential homebuyers rush to lock in rates before they shoot higher. This has been a different housing cycle, and perhaps buyer behavior will be different also.
Stocks were up in early trading today as Fed Chairman Bernanke addressed Congress. As expected, he talked up the benefits of the Fed’s bond buying program and gave little guidance as to when those purchases would start to taper. However, the minutes of the May 1 FOMC meeting were released later in the day, suggesting the Fed could begin tapering operations as soon as June. The result was a downside reversal day. The Dow, up 155 points at one point, reversed course and fell 277 points before closing with an 80-point loss. Market pundits have been premature in trying to call the market top all year. One of these times they will be right, and maybe this will be it.
Evidence of continued sector rotation is again visible in our rankings. Although we see leadership shifting nearly every week, it is very important to keep in mind that all sectors are participating in the market advance. The minor rotation among sector and industry categories is mostly a sideshow. That being said, Financials claimed the top spot this week after starting the month in the lower half of the rankings. Consumer Discretionary slipped to second. Real Estate continues its quiet climb, this week landing in the #3 spot. We’ll have to see how much damage today’s action causes. The Industrials sector was a big mover, jumping from seventh to fourth. Transportation, defense & aerospace, and large industrial conglomerates combined to push the category higher. Health Care fell two notches to fifth. Among the lower ranked sectors, Energy is making an upward push and climbed two positions this week. Technology is getting a large amount of financial media attention, but so far it has been unable to advance beyond its 8th place ranking. Utilities brings up the rear once again.
The top three Style categories are the same as last week, and today they are posting identical momentum scores. Mid Cap Growth, Mid Cap Blend, and Small Cap Growth are leading a strong lineup of Style categories that does not contain any real slackers. There are not any distinct patterns of Growth over Value or capitalization segmentation in today’s rankings. Mid Caps are the primary exception to this observation and seem to define the sweet spot. Growth is preferred over Value for Small and Mid Cap stocks while Value wins out over Growth for the Large Caps. Small Cap Value and Large Cap Growth are typically at opposite ends of the rankings, but today they find themselves side-by-side.
Japan maintains its position as the top performer across all 33 equity categories in our ranking charts. Many are calling the rally in Japan unprecedented, but that is not entirely accurate. Japanese stocks have staged numerous advances over the past couple of decades, and most were more impressive than the current move. The iShares MSCI Japan ETF (EWJ) surged 115% from late 1998 to early 2000. About 10 years ago, it commenced a three-year advance that saw its value increase more than 140%. It completed another 72% advance about two years ago. At the present time, EWJ is more than 40% higher than it was back in November. A nice move and a welcome one, but it is far from unprecedented.
Our eleven Global ranking categories fall into four groups today. Japan is in a group by itself, far out in front. The next group consists primarily of the world’s other developed markets spanning the U.S. to the U.K. The third group contains the lagging categories of Emerging Markets, China, Pacific ex-Japan, and Canada. Latin America is also a group unto itself and is the only category registering a negative trend.
“Because only a healthy economy can deliver sustainably high real rates of return to savers and investors, the best way to achieve higher returns in the medium term and beyond is for the Federal Reserve–consistent with its congressional mandate–to provide policy accommodation as needed to foster maximum employment and price stability.”
Federal Reserve Chairman Ben Bernanke, May 22, 2013
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