Home Sales in the Dumps Again
Financial authorities have taken a wide variety of unusual steps in the last two years. Leaving aside for a moment the wisdom of these actions, today we want to look at one of the side effects. Special interventions tend to distort the economic picture and make forecasting even more difficult than it already is.
Case in point: the homebuyer tax credit that was intended to rejuvenate the U.S. housing market. Did it work? The one thing we know for sure is that the various housing market statistics became temporarily distorted and have been swinging wildly from month to month – not only in response to the economy, but because of expiration dates and political events. There is no way to measure how many homes were sold as a result of the tax credit that would not have been sold anyway. Some may have sold sooner or later than they otherwise would. Possibly the program was very effective, or possibly it was a giant waste. No one knows.
In any case, housing reports this week contained little good news. Figures from the Commerce Department show that new-home sales are now running at the lowest annual rate since 1963. The available supply of both new and existing homes suggests that no quick solutions are likely. Buyers are taking their time while sellers are unwilling (or unable) to lower their asking prices. Record-low mortgage rates are not much help when unemployment is stubbornly high. The housing market weakness is weighing heavily on economic recovery prospects. Unfortunately, the only effective solution may be time.
The stock market has formed a downward-sloping trend channel starting at the April high point. Even after declining the last two weeks, the S&P 500 is still in the upper half of the channel. The next stop is likely to be a re-test of the 1,000 zone. If support in that area fails, further downside could be painful. Day-to-day market action continues to be driven by headline news, so volatility will probably remain high.
Treasury yields are plunging even lower; the ten-year bonds traded as low as 2.42% today. Now is probably a good time to remind everyone that the mere fact a fund/ETF has “bond” or “Treasury” as part of its name does not mean it is safe, conservative, and stable. Long-term Treasury bonds are often more volatile than stocks, in fact. Your principal is safe only if you hold them to maturity – which means locking up your money for ten, twenty, or even thirty years. If you are willing to wait that long, the thirty-year bonds are now yielding around 3.6%. Before you rush out and lock in this mighty return, don’t forget about the possibility of inflation recurring sometime between now and 2040.
Utilities and Telecom still own the top two spots in our Sector rankings. They are also the only two managing to maintain any semblance of a positive trend. Consumer Staples, another historically defensive sector, moved into third place. Most sectors weakened significantly in the last few days, but probably none more so than Materials. This sector had popped higher based on takeover speculation in fertilizer companies, but now the excitement seems to have diminished. Acquisition activity in Technology is also failing to boost that sector, and Tech is still just one position off the bottom. Financials actually strengthened their grip on last place; a flattening yield curve does not bode well for this group.
The gap between the Small Cap categories and everything larger continues to grow. U.S. Small Caps are the weakest area of global equities right now. No international categories are as weak, and from a sector standpoint only Financials are in as bad a shape as the U.S. Small Cap and Micro Cap groups. The latter has now undercut its early July low and further downside seems likely.
The United Kingdom ended its short tenure as the top Global category, falling behind Emerging Markets and Latin America. Japan surged in the rankings, climbing from last place to seventh. Strength in the Yen served to cushion a decline in Japanese stocks, at least for dollar-based investors. The European Union is once again on the bottom amidst realization that debt problems have not gone away.
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
“Our gross contract numbers were not impressive.”
Robert Toll, chairman, Toll Brothers Home Builders
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