August 22, 2018

Stocks opened mixed this morning following yesterday’s brief run to all-time highs. The Dow and S&P 500 (SPX) are flat at the moment. It took more than 6 months to fully recover from last winter’s 10% correction. But here we are. The energy sector is up more than 1% for the second consecutive trading session. Other cyclical sectors like consumer discretion and technology are seeing a little bit of momentum. On the other hand, utilities, real estate and consumer staples are in the red again. So we’re seeing mini rotation away from interest rate sensitive stocks and back toward cyclical growth stocks. The VIX Index—a key measure of investor fear—is down again today to trade around 12.2. European stock markets are poised to close in green by about .2% after rallying yesterday. Commodities are mixed today but over the past week have begun to recover. The Bloomberg Commodity Index is bottoming after a 10% correction. WTI crude oil is trading back up around $67.40/barrel (remember, it started the month at $74). With the market action described above, you’d be forgiven for thinking that bonds must be selling off, but that’s not the case. Bond yields are mostly unchanged. The 5-year and 10-year Treasury yields are hovering around 2.72% and 2.83%, respectively.  

Chinese and US officials are again negotiating their trade dispute this week in Washington. And absent some kind of quick resolution, another round of trade tariffs will go into effect on August 23rd. According to Bloomberg, “economists doubt that anything concrete can be reached in this mid-level talk.” The first round of tariffs hit $34bil worth of imported goods from China. This latest round will affect another $16bil in imports. The Chinese have retaliated in direct proportion. The third round, potentially affecting $200bil in Chinese imports, is still in the proposal stage and wouldn’t take effect until next month. 

Toll Brothers (TOL) reported much better than expected second quarter results yesterday and the stock shot up nearly 14% (although it’s backing down 2.5% today). Management said orders for new home construction rose 7%, and average home sale prices rose 7%. Total sales during the quarter surged 27% from year-ago levels. Remember, homebuilder stocks have beaten severely as traders fretted over rising mortgage rates as well as rising construction costs. TOL stock fell 35% this year before yesterday’s turnaround. So this is clearly a relief rally. Turns out the company was never in the dire straits the shorts said it was. 

The Existing Home Sales Index fell in July to an annualized rate of 5.34 million transactions. That rate is about 1.5% lower than year-ago levels. We’ve seen some recent softness in the housing market mostly as a result of falling affordability levels. And that is a direct result of a nation-wide shortage in housing. But it’s also true that mortgage rates are higher than they’ve been in the past several years. According to Bankrate.com the average 30-year fixed mortgage rate is hovering around 4.4%. So while home prices continue to rise, the pace of price growth will probably decelerate from here. Over the long-term, home prices (adjusted for size) rise about 3.7% per year, but we’re been averaging 5-6% over the last five years. 
 


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