Mike Elerath, NSSA
Bill Roller, CFA, CFP®
NMLS #107972
Mortgage Rates
Mortgage rates fell last week. Freddie Mac reported the 30-year fixed-rate mortgage (FRM) averaged 4.81% with an average 0.4 point for the week ending November 21, 2018, down from last week when it averaged 4.94%. A year ago, it averaged 3.92%.
The 15-year FRM this week averaged 4.24% with an average 0.5 point, down from last week’s 4.36%. A year ago, it averaged 3.32%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 4.09% with an average 0.3 point, down from 4.14%. A year ago, it averaged 3.22%. Borrowers may still pay closing costs which are not included in the survey.
Summary
On a holiday-shortened week, economic data consisted of growth, albeit at a tempered pace, of the Leading Economic Indicators, mixed housing data and jobless claims, as well as weaker durable goods orders and consumer sentiment.
Global equity markets declined for another week, as all regions fell back in unison. Bonds were mixed as U.S. high quality bonds were little changed, but foreign bonds were negatively impacted by a stronger dollar. Commodities were again punished by another large decline in the price of crude oil.
Economic Notes
(-/0) Durable goods orders for October fell by -4.4%, which underwhelmed relative to the expected -2.6% drop; in addition, the September orders figure was revised down by nearly a percent. The headline number was led by usual volatile result from aircraft/parts, which fell by -60%; removing transports, the index gained slightly. Core capital goods orders were flat on the month, which fell below the +0.2% increase expected. However, core capital goods shipments gained for the first time in a few months, up +0.3%, which met expectations. Considering those details and caveats, the report was a bit weaker than hoped, but not dramatically so, and points to a regression back to slower economic growth that has been the baseline case aside from recent tax cut stimulus.
(+) Existing home sales for October rose by +1.4%, to a seasonally-adjusted annualized rate of 5.22 mil., which represented the first gain for the series in six months, and outperformed expectations calling for +1.0%. Condos/co-ops experienced gains over +5%, leading the way, while single-family units also rose just under +1%. Regionally, sales in the West rose +3%, while the Midwest suffered the only decline, down -1%. Interestingly, the ratio of cash buyers ticked up a few percent to 23% of the total, perhaps reflecting some impact from higher mortgage rates on financing activity, while inventories remain tight. Overall, the positive results served to buffer some of the recent negativity felt in the housing sector during the last few months.
(-) Housing starts for October rose +1.5% to a level of 1.228 mil. units on a seasonally-adjusted basis, below the +2.2% increase expected. In addition, September starts were revised up slightly. In breaking down the underlying components, multi-family starts, which tend to vary dramatically month-to-month, rose +10%, while the more stable single-family group fell by -2%. Regionally, the Northeast experienced a decline of -34%, while starts in the Midwest rose by +33%—highlighting the volatility of the month. Building permits fell -0.6% during the month overall, which was slightly better than the -0.8% decrease expected, although there were also upward revisions for the prior month. By segment, multi-family and single-family each declined to a similar degree, while the Northeast saw a gain of over +20%, followed by the Midwest, while permits in the West fell -8%.
(-) The NAHB homebuilder sentiment index for November experienced a sharp decline of -8 points to a level of 60, far beyond the 67 level expected. In fact, this represented the largest monthly decline in nearly five years. Each of the three segments declined, with current sales, prospective buyer traffic and future expectations all falling in similar fashion. Regionally, conditions were also poor, with the Northeast and West declining slightly worse than the nation overall, while the South and Midwest performed slightly better, although still at a negative rate. Per history, such as result may prove disappointing for upcoming housing results, which have slowed in recent months along with higher rates and appreciated housing prices.
(-) The final Univ. of Michigan consumer sentiment index for November fell by -0.8 of a point to 97.5, which fell short of consensus estimates of an unchanged reading, but continue to run at a generally high level. Current conditions and expectations for the future both declined in similar fashion. Inflation expectations for the coming 5-10 years were flat at 2.6%.
(+) The Conference Board’s Index of Leading Economic Indicators for October rose by +0.1%, which continued its positive pace, albeit a slower rate of change than the prior two months. For the month, contributors included consumer sentiment, the yield spread and credit, which offset weaker stock prices and jobless claims. The annualized rate of growth over the past six months was an annualized +5.2%, which was slower than the prior six-month period, which grew at an annualized +6.5% rate. The coincident indicator rose +0.2% for October, while the lagging indicator rose +0.4%. Those at the Conference Board noted that the trends point to the possibility of acceleration in the indicators having peaked, although growth remains solid—even though it could be at a more tempered pace going into next year.
(-) Initial jobless claims for the Nov. 17 ending week rose by +3k to 224k, a bit higher than the expected 215k, and the highest weekly level reported since early summer. Continuing claims for the Nov. 10 week, on the other hand, fell by -2k to 1.668 mil., but above the 1.653 mil. expected. Levels overall remain low, but seasonal adjustment difficulties may start to creep up during the holidays due to more sporadic shut-downs and temporary hiring.
Market Notes
| Period ending 11/23/2018 | 1 Week (%) | YTD (%) |
| DJIA | -4.40 | 0.26 |
| S&P 500 | -3.77 | 0.19 |
| Russell 2000 | -2.53 | -2.00 |
| MSCI-EAFE | -1.09 | -10.26 |
| MSCI-EM | -1.74 | -16.34 |
| BlmbgBarcl U.S. Aggregate | 0.03 | -1.92 |
| 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 |
| 11/16/2018 | 2.36 | 2.81 | 2.90 | 3.08 | 3.33 |
| 11/23/2018 | 2.41 | 2.81 | 2.88 | 3.05 | 3.31 |
In a holiday-shortened week, U.S. stocks suffered several negative days, in fact the worst Thanksgiving week since the 1940s, which has been somewhat historically unusual for later weeks in the year. Overall, the S&P ended down nearly -4% as stocks again tested lows from last month. From a sector standpoint, defensive utilities, consumer staples and healthcare held up best, while technology and energy suffered the most, each with losses over -5% on the week.
Comments from the Vice President about China’s trade policies were taken negatively, but concerns about global growth appear to be another key factor. The upcoming G20 meeting this week will likely be a focus, as the U.S. and China will have another chance to formally discuss trade. The technology sector has been the primary catalyst in the recent market weakness, chiefly in terms of global product demand in this part of the cycle. While the catalysts seem minor, such as Apple’s decision to no longer report unit sales of its various products—the pervasiveness these products led to analysts often looking to iPhone and iPad sales as an indirect measures of the health of the consumer. The removal of this data was taken by some as a negative sign of overall slowing. The overhang of potential increased regulation in the social media sphere remains another element that has bi-partisan Congressional support and, if implemented, could serve to certainly dampen prospects for certain firms. In some respects, the pullback should be no surprise, as stocks in the FAANG group (Facebook, Amazon, Apple, Netflix, and Google/Alphabet) have been the market ‘darlings’ that could do no wrong and shot up exponentially to higher and higher valuations; all members of that club are now in -20% correction territory. Oil prices have also been a source of concern, also related to fears of slowing global growth; however, while this affects energy sector earnings negatively, consumers and businesses generally benefit from cheaper energy prices.
Despite a stronger dollar, foreign stocks fared better than domestic, as Japan and the U.K. outperformed Europe and emerging market regions. As with recent weeks, sentiment remains focused on fears over global slowing and U.S./China tensions, but more specifically on the viability of the Brexit package, which needs parliamentary approval, as well as the contention between the EU and Italy over the latter’s proposed budget, which it has stubbornly refused to amend. The EU again finds itself in a difficult position, as buckling to an individual nation’s demands (with higher Italian deficits largely done to satisfy internal political aims) runs against the greater good of the EU as a whole and prevention of debt distress. At the same time, the EU is very much invested in a cohesive set of member states, as even rumblings of a departure have caused a poor financial market reaction.
U.S. bonds were flat on net, as treasuries benefited from increased flows, while corporate bonds lost ground as spreads widened, particularly in high yield. Foreign bonds fared poorly, as a stronger U.S. dollar pushed returns into the negative, although emerging market local bonds ended the week with positive returns, compared to weakness in dollar-denominated EM debt.
Real estate suffered minimal losses, despite weakness in equities broadly, and REITs in Asia outperforming with positive returns. Domestically, apartment/residential real estate fared decently, as it has year-to-date, along with weakness in the housing market.
Commodities lost significant ground as all broad sectors ended in the negative, and the dollar strengthened. Although natural gas gained a bit again due to weather vs. available supply dynamics, the energy group overall was led downward by the price of crude oil falling by another -11% to end the week at just over $50/barrel. As discussed previously, this decline has surprised many by its swiftness, but remains largely the result of higher supplies than expected, with Iran essentially staying on line for now, via the granted production exceptions (to Saudi Arabia’s chagrin), while fears over slowing growth overall have reined in speculation on oil prices moving higher.
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.