Virus Concerns Slam Markets … The Nasdaq fell from a record high to correction territory, down 10% in six sessions.
What it means – What a difference a week makes. With new infections occurring at a higher rate outside of China than inside the country, investors are now concerned that the coronavirus will severely cut global GDP. Chinese suppliers are running low on inventory and can’t get workers back to the factory.
Italy canceled the famous Venice Festival and is warning against people congregating in public places. It might be good for Netflix and food delivery companies, but this one looks like it’s going to hurt. But there’s good news on the horizon.
The calendar works in our favor. Such viruses don’t live well in hot conditions. As summer rolls around, the virus should naturally subside. And several companies are fast at work on a vaccine. Progress on either front should provide a bit of relief for health systems around the world as well as global financial markets.
Meanwhile, consumer spending has slowed. Next quarter’s earning estimates are being lowered for the fifth straight quarter. Today’s market bounce was technical but not supported by fundamental factors. Major market participants are still absent on the buy side.
S&P CoreLogic Case-Shiller 20-City Home Price Index Up 2.9% in 2019… It was a decent gain, although lower than 2018.
What it means – After decelerating during the first half of the year, home prices rebounded from mid-summer through December. And it all came down to one thing, interest rates. The Fed started cutting rates in the middle of last year, reversing course from raising rates as late as December 2018. As rates fell, buyers could afford larger mortgages with the same monthly payment. This was great, but it has a natural end. The 30-year mortgage sits at 3.41%. It’s questionable how much further it can drop as lenders become unwilling to write 30-year home loans at such low levels.
Interest Rates Fall to Record Lows… The 10-Year U.S. Treasury bond traded at 1.25%, the lowest yield in U.S. history.
What it means –Rates keep falling. The old view was that when economies slow down, interest rates fall because businesses borrow less. It’s a sign of recession. Then central banks lower rates to make borrowing more attractive, which spurs economic activity. Maybe that sort of thing happened 30 years ago, but it’s been a broken relationship for a long time. Companies raise capital in the equity markets. Bank borrowing exists, but it’s not the main business driver.
Now, interest rates are as much a function of what’s happening in the currency markets as anything else, which means we’re tethered to what happens at the ECB and the Bank of Japan.
With the coronavirus and higher sales tax putting the Japanese economy on ice, and the virus spreading in Italy, expect those central banks to take action, which will spill into the U.S. market. It won’t take long for the Fed to jump in so that the difference between U.S. and foreign interest rates doesn’t get wider.
New Home Sales Soar 7.9%… At an annualized pace of 764,000, new home sales in January rose to the highest level since July 2007.
What it means – The sales rate in January was 18.6% higher than the sales rate a year ago. There are some caveats, like seasonal adjustments and the warmer weather this year compared to last, but it’s still good news. In addition to higher overall sales, the median sale price also rose to $348,200, more than 10% higher than a year ago. As with the home price index, a portion of this good news can be attributed to lower interest rates. with inventory sitting at just 5.1 month supply and Millennials looking for hnew ouses, we’ll take higher sales any way we can get them.
Fourth-Quarter GDP Growth at 2.1%… Based on lower consumer spending and lower fixed investment, overall growth rose less than previously estimated.
What it means – Things were already slowing down before the virus hit. With GDP growth at 2.1%, we were just muddling along at the end of 2019. The big worries were less consumer spending than previously reported, and then falling fixed investment outside of real estate. This means businesses weren’t plowing more capital into their companies in anticipation of growth. With the coronavirus taking a bite out of the first quarter, things could get ugly in the U.S. Former Fed Chair Janet Yellen said the effects of the virus could push the U.S. into recession. Other central bankers share her concerns that risk of a global recession has increased. This raises investors hopes for some form of quantitative easing.
Durable Goods Orders Down 0.2% In January, Up 0.9% Excluding Transportation… Durable goods orders dipped after expanding 2.9% in December.
What it means – Military aircraft orders fell almost 20%, which dragged down the overall number. Away from planes and cars, orders were decent, at the highest level since April 2018. That was probably driven by furniture and appliance orders on the consumer side, and computer orders on the business side. One bright spot in the report was non-defense orders excluding aircraft, a proxy for business spending, which increased 1.1% after a dismal December. That’s nice, but all of this happened before the coronavirus took hold, so we can’t expect any spending to carry through to February and March.
Aging Boomers Are Smoking More Pot… According to a new study published in JAMA Internal Medicine, marijuana use among Americans 65 and older increased 75% over the last four years. The increase was most pronounced among educated, higher-income women. Some people recapture their youth with a motorcycle or car, apparently others do it with a bong. But there is a flip side. When it comes to pain relief, marijuana is effective and has shown few side effects, although there aren’t many U.S. studies on the drug. It could be that Boomers are simply finding a cheaper alternative to other pain medications, and this one has the added benefit of reminding them of the Summer of Love.
Data supplied by Dent Research/Delray Beach Publishing
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