Very little changed in the S&P500 last week. The large cap index inched up a tiny 5.7 points or just 0.25%. Volumes plunged because the end-of-the-year holiday season had begun. And not surprisingly, the index’s volatility level also declined—-it touched the lowest level of the year, even lower (but only slightly) than the complacent lows reached in the summer months.
So to sum up, stocks are back near all-time highs, and almost all fear in the stock markets has disappeared. Sadly, during these conditions, many mom and pop investors will wade into the stock markets for the first time…..ever or in a long while….and they will often get hurt, because it is during these types of conditions that all serious stock market retreats begin (huge run up in price combined with a big drop off in volatility).
Most of the US economic reports from last week were misses. Except for the core durable goods report, home sales, and the revised 3rd quarter GDP report, all the other reports disappointed. PMI flash services, headline durable goods orders, initial jobless claims, the Chicago Fed National Activity Index, the FHFA house price index, personal income, personal spending, and leading indicators all missed.
Technical analysis is still, strongly, suggesting that the S&P500 is extremely stretched to the upside. The bounce that began the day after Donald Trump was elected President is now almost two months old and has driven the S&P higher by almost 10%. This is a huge move in a very compressed period of time……and once again, this type of move has historically been followed by some sort of retreat, if only back down to the 50 day moving average which is roughly at 2,185.
Finally it’s worth noting that, as the home sales results have been implying for the last several years, the US housing market has been booming since it bottomed in mid-2012. Clearly, as the Fed drove down interest rates the reduction was passed along to home buyers who bought new and existing homes with record low mortgage rates.
But since Trump’s election, the yield on the US 10 year Treasury rate has risen by about 100 basis points, and not surprisingly the rate on the average 30 year mortgage rate has also risen by roughly the same amount…..from 3.4% to 4.3%. So if record low borrowing rates pushed US home prices back up to bubble levels, will the reversal of these low borrowing rates burst this home price appreciation?
Given that housing naturally remains the average household’s largest expense, it stands to reason that this sudden and massive jump in mortgage rates will hurt the US housing market. But just as the rise in prices took time to kick in, the reversal in home price appreciation will also take time to kick in. Housing—unlike say super liquid stocks—is a slow moving market where deals are negotiated and locked in over many weeks and even months. So changes in the direction of this enormous and very important market will take time to take effect.
But regardless of how long it will take to impact the US housing market, the effects will eventually be felt and they will hurt.