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Housing and the Fed Feed More Bull Market

Market Digest – Week Ending 8/22

After a brief pullback in late July/early August, the bull market is back. The S&P 500 hit a new all-time high this week and finished just shy of the 2,000 milestone, something very few imagined possible a year ago. The dollar continued to strengthen on the heels of last week’s flat Eurozone GDP announcement and fears that increasing tension with Russia could further complicate Europe’s fragile recovery. Fed Chairwoman Janet Yellen offered little new insight into future monetary policy in a much anticipated speech in Jackson Hole.

Weekly Returns:

S&P 500: 1,988 (+1.7%)
FTSE All-World ex-US: (+0.5%)
US 10 Year Treasury Yield: 2.40% (+0.06%)
Gold: $1,281 (-1.8%)
USD/EUR: $1.324 (-1.2%)

Major Events:   

  • Tuesday – Housing starts jumped 15.7% in July from a month earlier.
  • Tuesday – Home Depot reported better than expected sales and increased its outlook.
  • Wednesday – July Fed minutes revealed increased debate about the timetable for raising interest rates.
  • Wednesday – Bank of America reached a settlement to pay $17 billion for improper lending during the sub-prime crisis.
  • Thursday – Dealogic announced global corporations have issued just shy of $1 trillion in new debt this year, marking the fastest pace to reach the milestone.
  • Thursday – Fed Chairwoman Yellen said the US job market is improving but was noncommittal about future interest rate increases.
  • Friday – Ukraine said Russia has been using artillery against its forces both from within Ukraine and across the border. Meanwhile, Russia sent a convoy of trucks into Ukraine, purportedly to deliver humanitarian aid to rebel areas.
  • Friday – Shiite militia groups killed 65 Sunni Muslims in Iraq, prompting a breakdown in efforts to form a coalition government.

Our take:

The recovery in the housing has been a major tailwind for the US economy. Data earlier this year showed pockets of weakness, raising some concerns. This week’s strong housing starts data and earnings results from Home Depot should quiet skeptics for a while.

Among our client base, we still see a very strong desire for homeownership. 30 year mortgage rates are above all-time lows, but remain just a bit over 4%. It appears the Fed is in no hurry to raise rates, so that should persist for a while. In the Bay Area, it feels like there is construction on every available lot. As we learned in 2007, construction can dry up quickly. But for now, it remains a positive driver of growth and a reason to be optimistic for the coming year.

This week’s $17 billion settlement agreement between Bank of America and the Justice Department in some ways marks a symbolic end to the sub-prime crisis. Hopefully the later stages of this cycle are handled more appropriately.

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