The markets reacted positively to President Trump’s executive actions this week. Stocks made new highs and Treasury bond yields moved higher.
But December new home sales disappointed yesterday. It looks like rising interest rates are finally starting to take their toll.
Thanks to Dent Research, provided here is our weekly information roundup ending the week of January 27, 2017. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news.
Dow 20,000… Investors sent materials and manufacturing firms higher on the hopes that President Trump will champion a $1 trillion infrastructure spending binge.
What it means – It’s back to Groucho Marx. Are you going to believe me, or your own eyes? I’m on record as a naysayer about big government spending plans. The last one ended up filling state coffers for payrolls, not paving many roads or replacing a lot of bridges. But the equity markets are mainly driven by what people think lies ahead, not what’s actually on the books.
So here we are, at the nice, round number of 20,000. I’m seeing a light at the end of the tunnel, and I don’t think it’s the sky. I think it’s a train headed our way. When the reality of what’s possible interrupts the investment party, we could get run over.
U.S. Fourth-Quarter GDP Up 1.9%, Missing Estimates of 2.2%... For the year, GDP expanded 1.6%.
What it means – The fourth-quarter growth rate most likely will be revised in the months ahead, but it won’t matter. The number is still ugly. It proves that even though the markets shot to the moon at the end of the year, consumers and businesses were much more conservative. As Harry’s noted several times recently, it’s a long way from 1.6% growth to Trump’s goal of 4%. I don’t think we’ll get there before the 2020s.
U.S. Durable Goods Orders Down 0.4%, But Up 0.5% Excluding Transportation… Volatile aircraft orders dragged down the headline number.
What it means – Core durable goods orders, which excludes aircraft and defense spending, ticked up 0.8% and rose 2.8% on the year. That’s a decent, but not exciting number, and fits neatly in the narrative of steady but boring growth. One notable disappointment in the report was a 0.6% decline in unfilled orders, which means backorders are shrinking. This might foreshadow weakness in the months ahead.
President Trump Reverses Pipeline Orders… Included among his first executive orders were directives to resuscitate the XL Pipeline and clear the path for the Dakota Access Pipeline.
What it means – Some of his executive orders, like the one directing all agencies to stand down from enforcing the Affordable Care Act, signaled his intentions but didn’t have teeth. Not so for the ones on the pipelines, which should give new life to the energy sector in the U.S. President Trump also froze hiring across the federal government, excluding the military. He’s definitely out to shake things up!
U.S. Existing Home Sales Down 2.8% in December… The National Association of Realtors blamed the decline on higher interest rates and a lack of inventory.
What it means – There’s also that little detail of affordability. Existing home sales grew a mere 0.7% in 2016, while prices rose 4.0%. That’s the smallest price gain in years, but it still outpaces wage gains by a wide margin.
And there’s another problem – lending requirements. I’m currently in the market, buying a home and selling a home. Applying for a mortgage today is vastly different than it was 10 years ago, and it’s mostly driven by the Consumer Finance Protection Board.
Now, lenders can be held responsible many years later if a loan they made – and subsequently sold – goes bad. How can you verify that a person was creditworthy a dozen years after the mortgage was made? No one knows the answer, so lenders overcompensate, which makes the process almost impassable. No wonder first-time homebuyers remain on the sidelines.
New Home Sales Fall 10.4% in December… Just as with existing home sales, real estate professionals blamed the drop on higher mortgage rates.
What it means – This is where I call time out. Yes, the number is ugly, but keep in mind that these reports take actual sales, seasonally adjust them, and then extrapolate annual totals.
As you might imagine, December is not a big month for home sales, new or existing. When the small, actual number is massaged and then magnified, the results can be far from reality. I think home sales took a breather in December as everyone got used to the new reality of the political background, and also took stock of where interest rates are headed in the short term. And as I noted above, income is playing an outsized role in slowing down the pace of real estate transactions.
The real estate market is due for a breather, and even a bit of a setback, but I think sales will rebound a bit in January even as they soften over the course of the year.
The Chinese Have More Babies (Maybe)… The Chinese government relaxed its one-child program at the beginning of 2016, and just reported that births increased between 8% and 12%.
What it means – It’s hard to tell if the numbers represent an actual increase, or are parents just reporting more children because it is now legal to have another. I’m thinking it’s some of each.
Yes, parents with a second child are now reporting it, because that gives the child legal status for benefits like healthcare and education later in life. But some families that might have only had one child probably had a second.
The end result is the same. China now officially has more children… and it’s still not enough. Births rose to somewhere between 17.8 million and 18.4 million (they count by two methods), but the government estimates they need at least 20 million births per year to stave off a nasty economic downturn that will happen in the years to come as the working population shrinks.
Even the recent rosy numbers aren’t good enough to do that.
In a related story, China estimates its population will peak in 2030 at roughly 1.42 billion people. By that time, a full 25% of the population will be over 60 years old, compared to just 16% last year.
Fewer workers, more elderly. That is not a recipe for a healthy, growing economy… just ask Japan.
Ford Motor Company Booked a $3 billion Pension Charge in the Fourth Quarter… The cost represents a re-measurement of the company’s retiree assets and liabilities, and is mostly responsible for dragging Ford to a loss in the latest quarter.
What it means – Get ready for more of this. Investors and analysts will look past it, pointing out that the main operations of the company, making and selling cars, remains healthy.
That’s great, but it doesn’t get rid of Ford’s pension and healthcare obligations. Many large companies across the U.S. are in the same boat, or should I say car? With Americans aging and pension costs ballooning at both public and private entities, we face a long slog of moving money from operations, R&D, etc., to pension plans.
Next Week – The week of January 30 brings the first Fed meeting of 2017, along with the CoreLogic Case-Shiller Home Price Index and the U.S. Employment Situation report for January.
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