Beacon Rock Wealth Advisors is a financial planning and registered investment advisory firm in Camas, Washington. Through our relationship with Prestige Home Mortgage in Vancouver, Washington we originate residential and reverse mortgages. Check us out at https://beaconrrwa.com and our affiliated websites at https://reverse-mortgages.us and https://socialsecurityquestionsanswered4u.com. We are always available to answer your finance questions. Give us a call at (800) 562-7096 or send an email to [email protected].
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Mike Elerath, NSSA
Bill Roller, CFA, CFP®
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Mortgage Rates
Sam Khater, Freddie Mac’s chief economist, says, “Mortgage rates declined to start the new year with the 30-year fixed-rate mortgage dipping to 4.51 percent. Low mortgage rates combined with decelerating home price growth should get prospective homebuyers excited to buy. However, it will be interesting to see how the recent turmoil in the stock market will affect homebuying activity in the coming months.”
The 30-year fixed-rate mortgage (FRM) averaged 4.51 percent with an average 0.5 point for the week ending January 3, 2019, down from last week when it averaged 4.55 percent. A year ago at this time, the 30-year FRM averaged 3.95 percent.
The 15-year FRM this week averaged 3.99 percent with an average 0.4 point, down from last week when it averaged 4.01 percent. A year ago at this time, the 15-year FRM averaged 3.38 percent.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.98 percent with an average 0.2 point, down from last week when it averaged 4.00 percent. A year ago at this time, the 5-year ARM averaged 3.45 percent.
Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Borrowers may still pay closing costs which are not included in the survey.
Summary
Markets ended up last week. The Dow rose 1.6%. The S&P500 was up 1.9%, and the Nasdaq Composite rose 2.3%. The annual yield on the 30-year Treasury fell almost 7 basis points to 2.97%.
The big news last week was the end of the year. For 2018, the Dow fell 5.6%, The S&P 500 fell 6.2% and the Nasdaq lost 3.9%. The S&P 500 and Dow fell for the first time in three years, while the Nasdaq snapped a six-year winning streak. It was the first time ever that the S&P 500 fell for the year after rising in the first three quarters.
Economic data was sparse in the first week of the new year, with ISM manufacturing data disappointing, but employment numbers came in much stronger than expected.
U.S. equity markets recovered during the week, largely due to Friday’s job news and optimistically-received Fed remarks; international stocks were not far behind, with more tempered gains. Bonds also gained a bit of ground along with lower interest rates. Commodities earned positive returns, due to a recovery in crude oil prices.
Economic Notes
(-) The ISM manufacturing index for December declined by -5.2 points to a level of 54.1, below expectations for a 57.5 reading. This was the largest one-month decline in the index over the past decade, falling to its lowest reading in two years, which certainly didn’t help sentiment hoping for a break in the string of lackluster economic reports. The underlying components also showed weakness, with new orders, production, supplier deliveries and employment all coming in showing slower growth—however, keeping in mind that all indexes remain above 50 signify expansion, just to a lesser degree. Anecdotally, it appears some respondents continue to voice concern over the potential impact of trade policy and additional tariffs. While the damage has been calculated as minimal to overall GDP, one risk is that the impact on corporate and consumer sentiment could lead to more of self-fulfilled slowdown.
(+) The ADP employment report for December came in showing a gain of 271k jobs, which dramatically surpassed the 180k expected; however, the prior month included a -22k revision downward. Services employment rose by 224k, with sizeable contributions from professional/business as well as education/health. Goods-producing groups increased by 47k, which was dominated by construction. Overall, this report was taken as solidly positive, being the strongest ADP report in nearly two years.
(-) Initial jobless claims for the Dec. 29 ending week rose by 10k to 231k, versus expectations for 220k—in addition to a minor revision higher for claims during the prior week. Continuing claims for the Dec. 22 week rose by 32k, to a level of 1.740 mil., surpassing the 1.690 mil. expected, to reach the highest level in nearly six months. The holiday season can be challenging in terms of general ‘lumpiness’ for employment, which can make seasonal adjustments difficult, but overall claims levels continue to remain at lower levels from a historical standpoint.
(+) The employment situation report was solidly stronger than some had initially feared, based on apparent signs of weakness in some segments of the economy, which has led to speculation about GDP, weaker corporate earnings perhaps and how the Federal Reserve would react (if at all) in early 2019 policy meetings. This report appears to have kept these concerns at bay, at least temporarily. At the same time, odds of a rate increase in March have fallen substantially from just a few months ago, to minimal chances for policy change.
Nonfarm payrolls rose by 312k in December, compared to the 184k level anticipated, along with a nearly 60k revision upward for the past two months. The result was the strongest report since February. Service-sector jobs rose by 227k, led by an increase of 82k in health/education. Other key areas of strength included health care, restaurants/bars and retail—in keeping with the seasonal uptick around the holidays. Manufacturing and construction jobs were also solid during the month. A rebound due to negative weather effects from prior months may have contributed, evidenced by the sectors seeing the strongest gains; however, the diffusion ratio that measures job adds was broad across a variety of industries.
The unemployment rate ticked up by 0.2% to 3.9%, which was unexpected, but remains lower than the 4.1% level a year ago. This is an important point, being that an especially-correlated future recession metric involves the rate of change between the current jobless rate and that of the year prior. The labor force participation rate also ticked higher, to 63.1%, which is about as good as it’s been over the last several years. However, the affiliated payroll survey showed only 142k in job gains, and the U-6 underemployment rate was unchanged at 7.6%.
Average hourly earnings rose 0.4% on the month, a tenth higher than expected, and pushed the year-over-year change to a cycle high of 3.2%. Wage increases were led by the production and non-supervisory employee segment, which tends to be more persistent. Average weekly hours also rose by a tenth to 34.5.
Market Notes
| Period ending 1/4/2019 | 1 Week (%) | YTD (%) | 2018 |
| DJIA | 1.65 | 0.50 | -3.48 |
| S&P 500 | 1.90 | 1.03 | -4.38 |
| Russell 2000 | 3.22 | 2.40 | -11.01 |
| MSCI-EAFE | 1.43 | 0.98 | -13.79 |
| MSCI-EM | 0.24 | -0.07 | -16.64 |
| BBgBarc U.S. Aggregate | 0.46 | 0.21 | 0.01 |
| 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 |
| 12/28/2018 | 2.40 | 2.52 | 2.56 | 2.72 | 3.04 |
| 12/31/2018 | 2.45 | 2.48 | 2.51 | 2.69 | 3.02 |
| 1/4/2019 | 2.42 | 2.50 | 2.49 | 2.67 | 2.98 |
U.S. stocks recovered over the New Year, solely due to Friday’s response to a much better than expected jobs number and report from China’s commerce ministry that additional trade talks will be occurring this coming week (reassuring markets that there is more happening behind the scenes than headline news would imply). By sector, energy recovered with a 5% gain, followed by strength in communication services, while utilities and technology lagged—the latter brought down by lowered forward-looking revenue projections for large sector weighting Apple. Company-specific results don’t usually have the power to move markets, but the pervasiveness of Apple’s products globally can result in assumptions made between the firm’s projected sales and worldwide economic growth—both of which look to show slowing in 2019.
In addition, dovish comments from FOMC Chair Powell at the American Economic Association alluded to an even more measured approach to implementing policy (that they are not on a ‘preset path’ to raising rates not matter what). This was more nuanced than what has already been communicated—largely taken by markets as a sign of a possible pause in the pace of rate increases in upcoming meetings. Although fundamentals remain in growth mode, a weaker stock market itself can result in a self-fulfilling prophecy by tightening financial conditions as much as rising rates or widening credit spreads could, in terms of the potential negative impact on sentiment. The Fed is fully aware of the impact of their wording (formal and informal) on markets and can take opportunities like this to ‘fine-tune’ their message as needed. In fact, this type of policy is what is referred to by economists as ‘forward guidance’ and shouldn’t be overlooked as a method for tightening or loosening perceived financial conditions in the near-term, and to restore calm to financial markets; however, longer-term results continued to be driven by actual policy action, via rates and balance sheet activity, as opposed to reassuring words alone.
Foreign stocks gained, albeit to a lesser degree than U.S. stocks, in local terms, but were boosted a bit further by a weaker dollar. Results as of late in local terms continue to be correlated to global economic prospects, probabilities of the U.S.-China trade tensions being resolved, as well as region-specific items such as Brexit and the Italian budget. The latter appears to be less of an issue with further budget cuts ongoing to trim the expected deficit as required by European officials. Emerging markets ended the week in the negative in local terms, which translated into a small positive after accounting for a weaker dollar. Weakness in Asia ex-Japan, such as Korea and Taiwan, was offset by strong results in Russia and Brazil, with commodity prices stabilized and optimism over the new Brazilian president boosting sentiment—with hope for improvement in the areas of deregulation and government pension reform—both of which have been bogging down potential economic growth in past years.
Economic softening in China may be a bit deeper than many expected, although data is mixed, with manufacturing results weaker, while services continue to show strength (similar to the pattern of such readings in the U.S.). The Chinese central bank lowered bank reserve requirements by a percentage point to 13.5%, which has the monetary effect of easing, by injecting nearly $120 billion into the economy through increased implied lending activities. This is the fifth of such cuts in the reserve rate in the past year.
U.S. bonds generally gained ground as yields ticked lower—along with the dovish Fed comments tempering the probable path of rate increases in 2019. Interestingly, long-duration governments outperformed, but were matched in performance by high yield and floating rate bank loans, which benefitted from tighter spreads compared to prior weeks. Minimal returns in foreign developed market bonds were helped by a weaker dollar, which added a half- to a full percent of returns—notably boosting returns for emerging market debt.
Commodity indexes showed a gain, led by a sharp increase in energy, followed by a lesser increase in precious metals, while other segments were mixed on the week. The price of crude oil recovered by nearly 6% to just under $48/barrel, as a result of stronger U.S. economic data (potentially affecting demand) and further talk of OPEC supply reductions taking hold in 2019.
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, Freddie Mac, 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.