December 28, 2016

Stocks opened lower this morning (Dow flat; SPX -.27%). Much is begin made of the Dow’s attempt to achieve the 20,000 mark, which is an arbitrary or “psychological” level. But since Dec. 20th when it first looked like a real possibility, markets have treaded water. And trade volume has been light. Today, all eleven sectors are down, led by REITs (-.9%), semiconductors (-.6%) and biotechs (-.6%). The VIX Index climbed back to 12.5 and VIX January futures are trading around 14.3. But traders aren’t expecting a lot of volatility in the next 30 days. And that’s strange because the last three Januarys have been weak for the stock market. WTI crude oil is hovering around $54/barrel. Bonds are modestly higher in price as yields dip. The 5- and 10-year Treasury yields are trading at 2.06% and 2.55%, respectively. 

Pending home sales (i.e. contracts signed) quickly reacted to higher mortgage rates by falling 2.5% in November from prior month levels. This was the first monthly decline in three months. The housing industry has been challenged by low for-sale inventories and now higher interests rates. Barron’s says the average mortgage rate rose .5% during November. Home sales could dip a bit in the first half of 2017. But it’s not all doom and gloom. On a year-over-year basis, pending sales actually climbed 1.4%. And the National Assn. of Realtors raised its forecast for US existing home sales to 5.42 million units in 2016 from the prior forecast of 5.25 million. That would be the highest annual level since 2006. Finally, the most important variable for  the housing market in 2017 is economic growth, which could sustain home-buying activity even if rates continue to rise. 

Mastercard (MA) says it expects holiday retail sales (Nov. 1st through the end of the year) to rise 4% from 2015 levels. That’s a fairly robust growth rate but it won’t benefit all retailers. Growth continues to be skewed toward online sales, rather than brick-and-mortar stores. According to Bloomberg, through Dec. 19 mall foot traffic was down 10% y/y. On the other hand, CNBC notes Amazon (AMZN) commands 36.9% market share of all online transactions and the company says this holiday season was its best ever, thanks to a late December surge. 

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