Home prices were up 0.6 percent in July but the annual growth rate slowed down, with year-over-year home prices rising 6.7 percent. This is the slowest pace since late 2012 and a slowdown from the annual growth of 8.1 percent in June. It may not sound like it, but it’s actually a good report. Home price increases are outpacing inflation and every tick up in prices means more upside for home owners who have been underwater. They’re on their way to being above water or may be above water already. More good news about the slower rate of appreciation is that it will attract more new buyers into the market. Please follow the S&P Case Shiller Home Price on page 59 of the Global Perspectives book.
Consumer spending rebounded in August, up 0.5 percent, led by auto sales which were the highest since January 2006. This is another indicator that the economy is indeed expanding at a moderate pace. Meanwhile, the bond market is abuzz with news of a shake-up in the biggest bond house in the U.S. As money shifts, investors may be tempted to park their funds in cash for fear of rising rates. However, we have been in a rising rate environment for a year now. Bonds are the diversification and risk control you need to sleep at night when all of the geopolitical noise keeps you up. Please see an example of a diversified portfolio on page 5 of the Global Perspectives book.
U.S. GDP for the second quarter was revised upwards. The final reading came in at 4.6% up from 4.2%, primarily because of better exports and higher business investment. This is the best economic performance since fourth quarter 2011 when the economy also grew by 4.6%. Please follow GDP on page 63 of the Global Perspectives book.
Look past the headline durable goods orders, which on the surface plunged by a record 18.2 percent in August after a record surge of 22.5 percent in July. The huge swing was mainly because of volatile commercial aircraft orders. New orders for durable goods rose by a seasonally adjusted solid 0.7 percent and more importantly business investment also increased. Business investment is slowly climbing back after dropping more than 16.7 percent in 2009 and non-residential fixed investment is now steadily claiming a bigger contribution to GDP. This investment is more economically beneficial than using corporate earnings for dividends and the recent rash share buybacks. The final Q2 GDP number is due tomorrow and don’t be surprised if you see another upward revision. Meanwhile, the positive trend on the employment front continues with initial unemployment claims ticking up to 293K last week, but coming in less than expected and hovering near an eight year low. Please follow durable goods on page 62 of the Global Perspectives book.
New single family home sales, which are based on pending contracts, jumped at the highest rate since 1992, surging 18 percent to an annual level of 504.000. Some other positive housing news - the share of deals in existing home sales that were all cash fell to 23 percent in August from 29 percent in July. This is the lowest share since 2009 and opens a wider avenue for first time buyers. Also, the number of homes available is up 4.5 from July 2013, giving buyers more choices. Continued job growth and an easing of credit conditions are needed to keep the housing market moving in the right direction. Please follow Home Sales and Housing Starts on page 60 of the Global Perspectives book.
Geopolitical uncertainty may be the Rodney Dangerfield of the markets, currently getting "no respect". The U.S. and several Arab nations yesterday carried out air strikes against ISIS in Syria and the market yawned. The possibility that China might miss expectations in the HSBC Manufacturing PMI moved the market a lot more yesterday, but fortunately it came in above expectations today. Emerging markets are driving global growth and hopefully we will get more record IPOs from China and other emerging markets. Meanwhile, getting back to normal means broad global diversification; please refer to our latest monthly report.
There is lots of excitement in the market today with the launch of one of the biggest IPO’s of the year and widespread relief that Scotland voted not to upset the economic apple cart, opting instead to stay unified with Britain. As the stock market continues higher some investors are worried that complacency is urging excessive risk taking and could spell trouble for the market. Widespread stimulus and artificially low rates do create potential for bubbles. On the other hand, fundamentals are strengthening and providing support for higher equity market levels. As of yesterday’s close the S&P 500 is trading at 15.6 times 12 month forward earnings, well within historical averages. Additionally, according to Factset analysts expect earnings growth for the S&P 500 “to be much higher through the middle of 2015. For Q4 2014, Q1 2015, and Q2 2015, analysts are predicting earnings growth rates of 9.2 percent, 10.2 percent, and 10.9 percent, respectively.” So how should investors take advantage of climbing stock indices while remaining cognizant of the risks? Glad you asked. Broad global diversification is the key. It may not be as exciting as the latest and greatest IPO, but over time it helps investors weather market cycles and build wealth. Please review the latest Global Perspectives monthly commentary for our latest views on the market.
The market took solace in the fact that the “considerable time” phrase was left in the Fed’s policy statement. Not so fast though. This phrase cost Janet Yellen nothing because despite maintaining that interest rates will remain low for a considerable time, Fed Chair Yellen reiterated that rate decisions will be based on economic data. The economic data has been getting better so considerable time might be first quarter. For now the market can just ignore that 800 pound gorilla. Meanwhile, the U.S. economy posted some mixed news this morning. Housing starts fell 14.4 percent to 956,000 last month from 1.12 million in July, which had been the fastest pace since 2007. However, builder confidence rose to the highest level in nine years. On the employment front, the number of initial unemployment claims dropped 36,000 to 280,000 last week. This is the lowest level since mid-July when we reached the best readings since May 2000. Please follow jobless claims and the headline unemployment rate on page 58 of the Global Perspectives book.
The Fed meets today and investors are anxiously waiting to see if Janet Yellen removes the "considerable time" provision in the language regarding rates. If she does, this in theory would seem to move the rate timetable up. The market is taking comfort in the latest below target inflation report because it seemingly takes some of the heat off the Fed. U.S. consumer prices fell in August for the first time in 16 months, declining 0.2 percent. The bulk of the decline was due to energy prices which declined 2.6 percent, offset partially by another increase in food prices. If investors assume the U.S. is slipping into a low inflation/deflation scenario a la Eurozone it would be a mistake. The U.S. economy is gaining steam. The employment picture, the Fed’s other concern when it comes to raising rates, has been lagging but is also firming up. The latest number of job openings is the highest in 13 years and there are only now 2.1 applicants for each potential position. Investors don’t seem to realize better economics trump Fed language modifications so we could be in for a spike in volatility on the road back to normal. Please follow inflation measures on page 65 of the Global Perspectives book.
Also, if you missed Karyn's Sept. 16th appearance on CNBC's Closing Bell, watch it here.
Europe just can’t catch a break. Two of the top three economies in Europe are troubled including Italy and France. In Italy, GDP is in recession after two consecutive quarters of contracting growth along with having to grapple with deflation. Yes, deflation is synonymous with depression. France has just pushed off its target to achieve the EU mandated deficit of 3 percent to 2017 from its original target of 2013. Well, with its zero GDP growth for Q2, it may be better to say c’est la vie to achieving fiscal targets. Meanwhile, the ECB implements the first targeted long-term refinancing TLTRO) operation this Thursday and U.S. economic growth and inflation are accelerating. In particular today’s PPI inflation number hit a healthy 1.8 percent YoY. Investors would be well-advised to accept normal volatility and take this time broaden their portfolio to build wealth and mitigate risks. Please see the Voya Global Perspectives latest market outlook.