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, “The U.S. economy remains on solid ground, inflation is contained and the threat of higher short-term rates is fading from view, which has allowed mortgage rates to drift down to their lowest level in 10 months. This is great news for consumers who will be looking for homes during the upcoming spring homebuying season. Mortgage rates are essentially similar to a year ago, but today’s buyers have a larger selection of homes and more consumer bargaining power than they did the last few years.”
The 30-year fixed-rate mortgage (FRM) averaged 4.41% with an average 0.4 point for the week ending February 7, 2019, down from last week when it averaged 4.46%. A year ago at this time, the 30-year FRM averaged 4.32%.
The 15-year FRM this week averaged 3.84% with an average 0.4 point, down from last week when it averaged 3.89%. A year ago at this time, the 15-year FRM averaged 3.77%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.91% with an average 0.3 point, down from last week when it averaged 3.96%. A year ago at this time, the 5-year ARM averaged 3.57%.
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 were up slightly last week. The Dow Jones Industrial Average was up 0.2% to 25106.33, the S&P500 Index up a fraction to 2707.88, the Nasdaq Composite up 0.5% to 7298.20. The annual yield on the 30-year Treasury fell 5.6 basis points to 2.98%,
Economic releases were again light, as the impact of the government shutdown has altered schedules for now-stale data, but the week did see a weaker, but still strong, result for ISM non-manufacturing, a trade balance that moved further into deficit than expected, and jobless claims continued to indicate strength in labor markets.
U.S. equity markets were flattish on the week as earlier optimism again tapered off due to skepticism about a U.S.-China trade agreement, although foreign stocks fared worse due to a stronger dollar. Bonds performed decently on the back of lower interest rates. Commodities declined on the week, driven by lower prices for crude oil and natural gas.
Economic Notes
(-) The ISM non-manufacturing index for January fell by -1.3 points to 56.7, which disappointed relative to an expected lesser decline to 57.1. Under the hood, new orders and business activity both declined for the month, especially the sub-component of new export orders, while employment improved by just over a point. Anecdotally, there was continued mention of tariff concerns, as has been the case for the past several months, in addition to the recent government shutdown holding back sentiment somewhat. However, a growth pace in the mid- to upper-50’s continues to indicate robust growth in the services sector of the economy, although this is not as closely watched of perhaps as meaningful indicator of economic conditions at the margin, relative to manufacturing.
(-) The long-delayed factory orders report for November showed a decline of -0.6%, contrary to expectations for little change. Core capital goods were revised slightly lower for a prior month, those for durable goods rose by 0.7%.
(-) The trade balance for November, another late report, showed a deeper decline than expected, by -$6.4 bil. to a deficit of -$49.3 bil., compared to the consensus expectation of -$54.0 bil. Goods imports fell by -$8 bil., which overwhelmed the minor decline in exports of just over -$1 bil.—the large import decline could be related to previous month timing of orders designed to avoid new tariffs on Chinese goods.
(0/+) Initial jobless claims for the Feb. 2 ending week fell by -19k to 234k, which did not quite reach the expected decline to 221k. Continuing claims for the Jan. 26 week fell by -42k to 1.736 mil., which ended just above the forecasted level of 1.733 mil. It’s possible that seasonal issues from the prior holiday-shortened week may have played a role in the recent results, with no other anomalies being reported. Most claims originated from the largest states, as expected.
(-) The Q4 2018 edition of the Fed Senior Loan Officer Opinion Survey showed a general tightening in lending standards for both industrial and commercial loans, in addition to weaker loan demand overall. About a fifth of banks in the survey reported wider interest rate spreads, with a number just below that reporting a narrowing of spreads—resulting in a net tightening of conditions. (Such stats in the survey are measured by the percentage of banks acting in one way versus another, as opposed to the magnitude of such changes.) Demand for real estate loans on both the commercial and residential side also declined, as seen in other surveyed data pointing to softer housing market statistics. Consumer installment and credit cards loans also experienced weaker demand in the period. Lending standards, however, for commercial/industrial and all types of real estate loans, as well as consumer installment loans, were little changed in the quarter. On the more pessimistic side, lenders expected standards to further tighten in 2019, in addition to delinquencies and charge-offs to rise—again, not surprising in keeping with broader expectations for economic weakening.
Question of the Week: Are we destined for recession?
Not necessarily in the immediate future—although the probabilities of one have moved higher in recent months—but at some point, yes. Based on a rough survey of indicators put forth by various sources, the odds of one happening in the next year have risen to about one-quarter, with one a few years away are up to around one-half. Market-implied probabilities were even higher than this at the start of the year, with expected levels for the fed funds rate at the end of 2019 showing little to no movement from current levels. Interestingly, when looking at fed funds futures for December 2019, the odds of rates moving lower (now about 20%) are now above the odds of rates moving higher, which was a seemingly absurd thought just a few months ago. Despite the soured outlook, these measures are actually back in line with historical averages—since a recession has occurred about once every five years, a one-fifth probability in any given year has been a reasonable estimate.
Where have the recent concerns come from? Several economic indicators have shown deceleration from fast-growing levels. These include the industrial and manufacturing segments, as well as consumer and business sentiment, not to mention the ongoing sluggishness in homebuilding—despite housing prices remaining at elevated levels nationally, which has given owners perhaps a misplaced sense of confidence. The difficulty in evaluating such changes in real time during an economic cycle is that it’s impossible to tell if they indicate one of several mid-cycle ‘slow patches’ or, more ominously, signs of the cycle’s later innings morphing into recession. We’ve experienced several slow patches in the current decade-long cycle, perhaps best thought of as ‘mini-recessions’, where growth stayed positive, but just at a slower degree. It’s important to note that slowing growth or deceleration is very different from negative growth, or contraction.
The good and bad news is that the Fed doesn’t have a crystal ball, either. This is where the ‘data dependency’ language comes from, speaking to a reevaluation of conditions on an ongoing basis to re-test for further weakness. This unpredictable nature of the economy reminds us that it’s more than a set of static data points; it’s an organism in continual movement and evolution.
Recessions seem mysterious but typically have originated from a limited list of causes. Historically, these have included tangible industrial/manufacturing slowdowns or spikes in oil prices, or the less obvious (until afterward) sources of too-stringent monetary policy, financial imbalances or government fiscal policy.
Cyclical business factors, such as inventories, have become less of an issue during the last several decades compared to tendencies seen prior. Historically, companies had a difficult time gauging demand and adjusting production quickly, as conditions changed, and, consequently, firms could end up with bloated inventories at the same time growth slowed. Better technology and ‘just-in-time’ manufacturing techniques developed in more recent years, as well as a steady shrinking of manufacturing as a proportion of the economy, and larger share assumed by services, has also played a role in this cyclical sensitivity decreasing. Oil shocks were also a more frequent source of economic disruption, but greater efficiencies have resulted in lower net petroleum use in developed nations, as well as higher U.S. shale production, which has acted as an important price stabilizer to cushion the impact of such shocks.
For as much criticism as the Federal Reserve gets, it’s done a relatively good job of maintaining its primary mandates of stable prices (i.e. low inflation) and maximum employment, using the blunt instruments of short-term interest rates and, more recently, long-term rates through quantitative easing. Modern monetary management has been more effective than in the past, given the better access to data and tools available. All still operate with a time lag, though, so precision is difficult and chances of a policy error haven’t been eliminated. A policy error refers to a central bank raising rates either too much or for too long—causing the intended slowdown to accelerate into a recession. Obviously, this is not the intent going in, but have come from the time lag and unforeseen events that crop up during the hiking process, and are more common than many think.
Financial imbalances, or even bubbles, can play a role in raising recession risks. Borrowing from the scientific realm, work in chaos theory, such as the study of mountain avalanches, etc., has been applied by some researchers to financial markets. The attempt is to measure which snowflake is the one that triggers the avalanche, but the less reassuring news is that the cause is often random and impossible to predict—only after the event occurs do the unstable fissures under the surface (sometimes) appear. Contrary to the last recession, when consumer spending and housing were growing at high rates, many called this growth the ‘new normal’ at the time. This time, economists have been watching growing levels of corporate debt, rather than consumer debt, for signs of strain, in addition to high levels of government debt worldwide taken on during and after the financial crisis. There could be other bubbles or fractures growing, but we likely won’t know until after the fact.
Government fiscal conditions can also act as a catalyst for a recession, whether it be from an oppressive tax policy, hurdles to trade or a miscellaneous geopolitical event, such as war. A situation such as ‘Brexit’ could dampen (and have dampened) growth, as uncertainty over key fiscal and regulatory arrangements can cause consumers and businesses to pull back on spending in a ‘wait and see’ mode until conditions are clarified. In a sense, this works similarly to a deflationary price feedback loop, where falling prices keep buyers on the sidelines due to the expectation of continued falling prices, where discounts to be had next week are better than those today. Then, no one buys, at least until a point of necessity or final capitulation, but a lot of pain can be had in the meantime as business activity is locked up. While rarer than more cyclical forms of economic decline, this type of sentiment can be far more damaging and long-lasting, as seen in many emerging market nations over their lifetimes, particularly in places where there has often been no light at the end of the tunnel for improvement (Turkey and Argentina come to mind in recent years).
Recessions sound scary, but they’re a natural part of the organic economic cycle, and impossible to avoid. In fact, an economy with no downturns can result in excesses that create other imbalances, which themselves heighten the odds an eventual ‘Minsky moment’ and a downturn at some point—it’s an infinite loop. Even in Australia, where the current economic cycle is going on 25 years and counting, recession-free, certain fundamentals have grown more inherently unstable, including extremely high housing prices and a dependence on the secular growth of China to support exports.
In our current case, U.S. growth is expected to evolve from the 2-3% level this year, declining towards 2% and maybe even the high 1’s during the next few years. This isn’t a lot of room for error in avoiding recession. But, at the same time, the difference between growing very slowly and no growth, or even slight negative growth (even a technical recession) isn’t that dramatic, compared to the full-accelerator to full-brake type of cyclicality seen decades ago, where the contrast was much more stark, harder to anticipate and counterbalance with policy, and causing much more damage to recover from in financial and labor markets. The Great Recession was a bit of an outlier in this sense, where an extreme financial excess resulted in the recession’s severity.
No Wall Street firm feels very good about forecasting a recession, let alone trying to get the timing right. What about the U.S. treasury yield curve? As we’ve discussed before, a yield curve inversion (where short-term rates rise above long-term rates, the opposite of the normal relationship) has been an effective predictor of recessions and, at least, economic slowdowns. Such downturns have tended to happen around 12-18 months from the time of a sustained yield curve inversion, historically. Bond markets have been a bit better than equity markets in forecasting incremental doom, so corporate credit spreads and bond defaults are other potential items to watch.
Even when they do arrive, typical recessions are not the end of the world, with the Great Recession of a decade ago being a deviation from the norm. Most do not last more than a few quarters, with the severity of the decline based on the cause and size of any excesses in the uptrend just prior to it. Of course, there is economic and societal unpleasantness in the difficult business conditions and higher unemployment rate. At the same time, it can be a fruitful time to invest—when no one else wants to.
Market Notes
| Period ending 2/8/2019 | 1 Week (%) | YTD (%) |
| DJIA | 0.32 | 7.91 |
| S&P 500 | 0.11 | 8.24 |
| Russell 2000 | 0.32 | 11.80 |
| MSCI-EAFE | -1.38 | 5.04 |
| MSCI-EM | -1.35 | 7.27 |
| BBgBarc U.S. Aggregate | 0.38 | 1.20 |
| U.S. Treasury Yields | 3 Mo. | 2 Yr. | 5 Yr. | 10 Yr. | 30 Yr. |
| 12/31/2018 | 2.45 | 2.48 | 2.51 | 2.69 | 3.02 |
| 2/1/2019 | 2.40 | 2.52 | 2.51 | 2.70 | 3.03 |
| 2/8/2019 | 2.43 | 2.45 | 2.44 | 2.63 | 2.97 |
U.S. stocks were flat on net as early gains tempered later in the week, as White House economic advisor Larry Kudlow noted that a ‘pretty sizable distance’ remains between the U.S. and China from a trade deal standpoint, and it appeared the U.S. administration would not be meeting with the Chinese prior to the initial March 1 deadline, when the 25% tariff level is slated to go into effect.
By sector, utilities, information technology and industrials all gained over a percent, while energy and materials ended the week in the week in the negative, in keeping with lower commodity prices. Real estate gained as well, fueled by lower interest rates and discounted valuations noted in several sectors.
Foreign stocks underperformed, ending with negative returns, largely as the result of a stronger dollar. For the first time in a few weeks, developed markets outperformed emerging in local terms, although on a USD-adjusted basis, results were similar. Trade concerns continued to dominate, as did the EU releasing their lowered forecast of growth, from 1.9% to 1.3% for 2019, including that in key nation Germany from 1.8% to 1.1%. The Bank of England did the same, lowering expectations for growth a half-percent to 1.2%, while keeping rates steady in the midst of ongoing uncertainty over the Brexit process. The Chinese stock market was closed for their Spring Festival celebration, while Brazilian stocks led emerging markets downward as negativity continued following the recent mining and dam failure disaster.
U.S. bonds fared well as interest rates ticked down again during the week. Investment-grade credit outperformed governments slightly, although long-duration (20+ year) treasuries performed best, by gaining over a percent. Flattish returns in local currency for both developed and emerging markets were turned negative after accounting for a sharply stronger dollar.
Commodities overall fell for the week by over a percent, with all groups in the negative. Minor losses in precious and industrial metals were coupled with more dramatic losses in the energy patch—crude oil and natural gas. The price of crude oil fell by nearly -5% on the week to just below $53/barrel, as reports/concerns of slowing demand in keeping with weaker global economic growth were further exacerbated by higher supplies.
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.