Mortgage Rates
Beacon Rock Wealth Advisors is an investment management and financial planning firm in Camas, Washington. Through our relationship with Prestige Home Mortgage in Vancouver, Washington we originate residential and reverse mortgages. Mortgage rates were up last Thursday 11/8/2018. The 30-Year Fixed Rate Mortgage was up 11 basis points to 4.94%, while the 15-Year Fixed rose 10 basis points to 4.33%.
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Summary
Economic news for the week included a FOMC meeting where interest rates were held steady, manufacturing ISM declined but remained strongly positive, and jobless claims continued to show labor market strength.
U.S. equity markets gained some ground last week, following the conclusion of the mid-term elections, while foreign stocks were mixed to lower on net. Bonds were positive as interest rates declined a bit following the Fed’s meeting. Commodities fell a few percent driven primarily by lows in crude oil, which is now in a bear market.
Economic Notes
(0) The FOMC meeting, as mentioned during the week, kept the target fed funds rate steady. The statement language was also minimally changed, noting only a moderation of business fixed investment, in keeping with recent meetings more or less on a calendar quarter basis where rates have been changed. Therefore, there was little to report. The odds of a rate hike in December seem to have moved upward a bit, mostly due to the strength of underlying economic data and low headline unemployment rate, although there had been some speculation about a possible slowing of the pace if the recent equity correction and corresponding tightening of financial conditions generally were also serving to ‘slow’ the economy organically.
(+) The ISM non-manufacturing index for October fell by -1.3 points to 60.3, but remained above the 59.0 level expected. New orders were little changed, supplier deliveries increased, while employment and business activity fell by several points for the month, as did prices paid. In keeping with recent months, concerns over tariffs continued to dominate the anecdotal feedback in the survey. Despite the small decline, a rate of 60 continues to demonstrate strong growth in the services sector, which represents the bulk of the U.S. economy, as opposed to manufacturing, which tends to still remain a higher profile report due to its high level of economic cycle sensitivity.
(0) The producer price index for October rose +0.6% on a headline level and +0.5% for core, exceeding the +0.2% increase for each expected. The bulk of the rise was due to the newer trade services category, which includes margins for retailers, and tends to be more volatile on a month-to-month basis—subtracting that segment, the PPI gain tempers to +0.2%. It appears that higher prices for food and energy during prior months were a factor.
(+) The preliminary Univ. of Michigan consumer sentiment report for November fell by -0.3 points from the October report to 98.3, which was still a bit higher than the expected 98.0 level. By sub-component, consumer assessments of current conditions ticked a tenth of a point higher, while expectations for the future fell by over a half-point. Inflation expectations for the coming year fell a tenth to 2.8%, while those for the coming 5-10 years rose by +0.2% to 2.6%. Overall, sentiment remains strong relative to history.
(-) The government JOLTs job openings report for September showed a decline to 7.009 mil., which fell beyond expectations calling for 7.085 mil. The job openings rate fell by -0.2% to 4.5%, as did the hiring rate to 3.8%; the quits rate was unchanged at 2.4%. Overall, the level of openings remains quite strong and indicative of a healthy job market.
(+) Initial jobless claims for the Nov. 3 ending week fell by -1k to 214k, which was right on target with the consensus estimate. Continuing claims for the Oct. 27 week fell by -8k to 1.623 mil., which was below the 1.634 mil. expected and their lowest level since 1973. It appears few hurricane effects are adjusting current numbers, with the largest claim figures originating from the larger states, as usual. Per the continued records being set, claims metrics remain extremely strong.
Question of the Week
How will the mid-term election results affect financial markets?
Unlike the surprise result in the presidential election two years ago, that fooled pollsters and statisticians both, last week’s results were in line with predictions—although a few surprises still unfolded. The Republicans held their majority position in the Senate, while the Democrats won a majority in the House of Representatives. However, both were by a slightly wider margin than initially expected.
Historically, a divided government has generally provided a mixed to somewhat favorable environment for equity market returns, but results were very much regime and economic-cycle dependent. This is a bit contrary to what some would first expect, based on the assumption that a pro-business, anti-tax Republican-led regime would always lead to stronger market sentiment; while Democratic leadership that’s pictured as anti-business and pro-spending/pro-tax would weigh on returns. The key, however, it seems in these results has been starting expectations, the need for certainty versus uncertainty, and how extreme policy ideas happen to be. Many times, high hopes for a regime aren’t always realized nor is extreme pessimism often warranted.
A divided government, with the inherent checks and balances on the various branches, can provide a ‘status quo’ outcome or a level of gridlock where little of significance (or fewer partisan policy ideas) are implemented. While that can be frustrating for voters, it can provide a level of certainty to markets (if nothing else, by removing uncertainty). For corporations, knowing what to expect is important when it comes to decision-making, growth initiatives and capital spending. In bond markets, more certain estimates on government fiscal spending can help in projecting the supply of treasury issuance, which leads to better understanding of technical market dynamics and possible paths for long-term interest rates.
With more balanced power, it obviously becomes much more difficult to pass single party-sponsored initiatives than it was during the last two years. Additionally, it’s probably fair to expect contention on a variety of issues that get to the core of each party’s base. Issues that remain at the forefront of congressional debate, including investment impacts, could include several of the following:
Taxes. While a divided Congress would pre-empt any reversal of last year’s tax cuts by the House, the chances for making individual and small business cuts permanent and/or proceeding with deeper cuts as first hoped a few weeks ago have also fallen. Concerns for Democrats are focused on the benefits for higher-income taxpayers relative to lower-income, while many on both sides are hesitant to further increase the deficit, which would be exacerbated by lower tax receipts in coming years.
Healthcare. After passage of the Affordable Care Act, attempts at full repeal or watering-down of various provisions has resulted in a gridlocked situation between the parties. Therefore, status quo could be the base case. However, there does seem to be consensus among both parties for a solution to the growing cost of prescription drugs and high profits earned by pharma and biotech companies. This could add potential uncertainty to elements of the health care sector, as we’ve seen tinges of in recent years.
Infrastructure. While supported by both parties, a widespread bill to shore up and expand America’s crumbling infrastructure is at risk for a variety of reasons. One is the cost. With the fiscal deficit already wide, partially due to recent tax cuts, adding an expensive plan could be a deal-breaker. Politically, whether Democrats are willing to partner with the President, who may claim victory on such a high-profile deal, also remains in doubt. If so, hoped-for gains in affected groups in industrials, energy and other segments may remain on pause.
Defense. Traditional Republican policy favors higher levels of defense spending, which has benefitted the aerospace group, while a Democratic-controlled house could certainly rein this in as a budget item.
Technology. There has been growing support on both sides of the aisle (for unique reasons) for some type of privacy regulation, considering the long list of data breaches and questions about information sharing for commercial purposes. The European General Data Protection Regulation (GDPR) implemented this year could serve as a model for what such legislation could look like in the U.S., but this is only speculation. This could negatively affect info tech firms, for whom this massive trove of data is a key asset, and earn substantial revenue from it.
Trade policy. With broad, and often unilateral, discretion remaining with the executive branch, the change of party leadership in the House may not have a direct effect on the President’s recent imposition of tariff policies. Formal trade agreements, however, such as the updated version of NAFTA, require legislative approval. Market sentiment sensitivity to trade news continues to run at a high level, with an apparent consensus base case that some type of deal with China will be put into place. Sentiment has been more challenged in Europe and Asia, which could be more negatively affected than the U.S. by a broader trade war.
Regulatory environment. In the financial sector, certain provisions could again be brought to the surface for discussion—notably those intended to reduce systematic financial risk or affecting consumer finance oversight to some degree. However, due to the split Congress, agreement on substantial changes is not expected. On a broader level, as with trade, the executive branch has a degree of discretion on lowering regulatory burden for companies, which is likely to continue.
Political sentiment. Talk has already begun about the numerous ‘impeachable moments’ that could be pursued by the House against the President. Requests for information through subpoenas and additional news focus could prove embarrassing at the very least, or worse, such as resulting in impeachment proceedings, if evidence of wrongdoing is found. Based on financial market responses during the Nixon and Clinton scandals, any big news here could raise volatility significantly. While fundamentals wouldn’t be necessarily affected, such an event would qualify as internal ‘geopolitical’ risk that shakes confidence in risk-taking generally.
Government operations. With a divided Congress, the risk of petty squabbles increases—this could manifest in the form of fights over short-term budget extensions (potentially leading to government shutdowns) and the government debt limit expiration next year (last time this negatively impacted the U.S. credit rating and raised market volatility significantly).
Market Notes
| Period ending 11/9/2018 | 1 Week (%) | YTD (%) | ||||||
| DJIA | 3.00 | 7.17 | ||||||
| S&P 500 | 2.21 | 5.74 | ||||||
| Russell 2000 | 0.12 | 1.95 | ||||||
| MSCI-EAFE | 0.23 | -7.96 | ||||||
| MSCI-EM | -2.06 | -15.73 | ||||||
| BlmbgBarcl U.S. Aggregate | 0.25 | -2.41 | ||||||
| U.S. Treasury Yields | 3 Mo. | 2 Yr. | 5 Yr. | 10 Yr. | 30 Yr. | |||
| 12/31/2017 | 1.39 | 1.89 | 2.20 | 2.40 | 2.74 | |||
| 11/2/2018 | 2.33 | 2.91 | 3.04 | 3.22 | 3.46 | |||
| 11/9/2018 | 2.36 | 2.94 | 3.05 | 3.19 | 3.40 | |||
U.S. stocks experienced a decent week, with a positive response to the mid-term election results that seemed to meet market consensus expectations. However, hopes that the Fed may temper the pace of recent rate increases due to market weakness this fall were dashed, which soured sentiment a bit. From a sector standpoint, more defensive sectors led the way, with health care, staples and utilities providing returns well over +3% each. Healthcare was likely helped by the prospect for continued subsidies under the ACA following a favorable House election. Lagging the pack most significantly was technology, and small caps overall experienced flattish results for the week.
Foreign stocks in developed markets also experienced a flattish response on net, with slight gains in the U.K. and Japan being offset by declines in Europe, as economic results have been underperforming expectations and concern over Italy’s budget situation persists. Emerging markets fared especially poorly, and lost ground on the week, led by especially weak results in Brazil as commodity prices weakened, and China, despite stronger-than-expected export numbers.
U.S. bonds fared well, as interest rates ticked downward. Investment-grade corporates were among the best-performing groups, outpacing both treasuries and high yield. The value of the dollar ticked up slightly, which pressured developed market government bonds as well as emerging market local debt.
Real estate in the U.S. was among the best performers of the week, while European and Asian REITs earned positive but weaker returns. Healthcare REITs led with sharply higher returns, in keeping with the health care sector broadly, with hopes of the ACA reimbursement system continuing in its current format.
Commodities fell back with a stronger dollar, and continued negative impacts from the metals sectors and energy, despite a double-digit gain from natural gas prices. Crude oil fell by nearly -5% on the week to close just above $60/barrel. Oil has officially moved into bear market territory, with prices down -20% overall from peaks in early October. To the contrary of concerns just a few weeks ago, fears of weaker global economic growth, that equate to lower demand have been coupled with rising supplies as Iranian sanctions appear to have a smaller effect on overall markets as first thought.
Sources: Ryan M. Long, CFA, FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, FRED Economic Research, Goldman Sachs, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. Residential and reverse mortgages are offered through Prestige Home Mortgage in Vancouver, WA.
Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.