Last week was uneventful. Much more of the same craziness. Stocks once again crept toward their all-time highs. The Treasury markets moved on Fed comments about the possibility of a rate hike next month. But it's all talk. Rates held steady and volatility diminished. In my opinion, the number to watch for is 2100 on the S&P 500. If the index rises above this point I view that as bullish behavior. If the index drops dramatically below 2100 I view that to be the bears are taking control.
Thanks to Dent Research, provided here is our weekly information roundup ending the week on May 27, 2016. We hope this information will help you separate the noise from the news. We start each subject with what you hear in the news and finish with what that information means to you.
April New Home Sales Rocket Higher, Up 16.6% Over March… The worry over new home sales in March appears misguided. In addition to
an unexpected jump in sales last month, the median sale price also jumped
7.8% to $321,000.
What it means – In March, new home sales, permits, and existing home sales posted disappointing results. But the residential real estate market staged a strong recovery in April. It looks like sales that are typically put on ice during the winter (pun intended) were pulled forward in the warm weather of January and February, which led to a weak March for the industry. Now things are back on track. I’m surprised at the strength of these numbers, especially given the high median sales price. With modest income gains, every jump in price cuts out more potential buyers.
The only cloud to this silver lining is that new home sales reports are notoriously volatile. It will take several months of solid numbers to verify the higher level of activity.
April Durable Goods Up 3.4%, Excluding Transportation Up 0.4%… Airplanes and autos were the main growth drivers last month. Without them, growth was hard to find. For the year, durable goods orders excluding transportation are down 1.4%.
What it means – I’m not sure how much longer the auto industry can hang on to current sales levels. Sub-prime auto loans are growing as a percentage of all car loans, and the payback period is getting longer. Remember when car loans were 48 months? That was so last century. During the 2000s, car loans extended to six years, and now many new loans are eight years. There’s only one reason to draw out the repayment period – to make the monthly payments affordable. At some point, this game will end.
Away from autos, things weren’t very rosy. Core capital goods (business spending) dropped 0.1% for the month, and is down 5% over the same period last year. Corporations still don’t expect a lot of new business over the next year, which should keep GDP growth in check.
Atlanta Federal Reserve Estimates Second-Quarter GDP Up 2.5%, New York Fed Estimates 1.7%… The competing GDP estimates expect average growth of 2.1%.
What it means – After first-quarter growth of 0.8%, an average estimate of 2.1% might sound like a boom, but let’s keep it in perspective. If the numbers hold, it would mean the U.S. economy grew at an annualized rate of 1.3% in the first half of the year. That’s pathetic on its own, but even worse because it follows the dismal fourth quarter of 2015, when the economy grew just 1.4%.
Fed Futures Imply a 28% Chance of a Rate Hike in June, and 45% Chance of Higher Rates by July… Even though economic growth remains muted, investors are raising their expectations for higher rates this summer.
What it means – When Fed governors keep pounding the table about a potential rate rise, investors listen. The problem is that higher rates don’t affect just U.S. capital markets. The move would make U.S. deposits more attractive, which would strengthen the dollar against foreign currencies, negatively affecting U.S. exports. At the same time, the Chinese yuan, which is pegged to the U.S. dollar, would also strengthen, putting pressure on their exports as well.
The Europeans and Japanese are cheering on the Fed, since higher U.S. rates make their currencies less attractive, giving them an export advantage.
I asked Dr. Lacy Hunt of Hoisington Investment Management what he thought the Fed should do. At this point, he believes they should do nothing with rates, and then stop talking! He noted that their forward guidance on economic growth has been horribly wrong for years, and they hold too many meetings, which keeps investors focused on what this small group will do next instead of watching market fundamentals.
Dr. Hunt is one of our guest speakers at the Irrational Economic Summit in October in Palm Beach, so you’ll get a chance to hear him live, as well as ask questions. If you haven’t registered yet, now is the time!
Affordable Care Insurance Premiums Set to Rise by Double Digits Next Year… Citing losses in the individual policy market, major insurance carriers are asking regulators for significant increases in 2017.
What it means – If you live in Georgia and have an individual insurance policy through Humana, don’t open the mail. It could give you a heart attack. The insurance company is requesting an average premium increase of 65%. That’s not a misprint. It almost makes the Anthem request of 28.3% in Indiana seem reasonable, or the 14% requested by Blue Cross Blue Shield in Florida (which is my carrier, thank you very much) look like a deal!
I’m not sure what kids read in school anymore, but they’d do well to review Orwell’s 1984. The language of the Affordable Care Act came right out of the Ministry of Truth, since there’s nothing affordable about it.
As costs rise, I expect more healthy people to simply opt out, particularly those under 35 with no family. This will leave insurance companies with even fewer healthy people paying into the system they don’t use, which means it will get more out of whack for 2018.
Next Week – U.S. markets will close Monday, May 30, in observance of Memorial Day. After that, we get reports on the S&P/Case-Shiller Home Price Index and the latest monetary policy statement from the European Central Bank. But as usual at the first of the month, all attention will focus on the U.S. Employment Situation report on Friday.
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