Market Digest – Week Ending 8/10

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[dropcap]P[/dropcap]ositive U.S. economic news translated to modest gains for stocks and losses for Treasuries. Increasing evidence of strength in the housing market boosted confidence, as did lower weekly jobless claims, but slowing exports from China dampened some enthusiasm. Prices for gold and oil rose.

Weekly Returns

S&P 500: 1,406 (+1.1%)

MSCI EAFE: (+1.7%)

U.S. 10-Year Treasury Yield: 1.66% (+0.10%)

Gold: $1,620 (+1.2%)

USD/EUR: $1.229 (-0.8%)

Major Events                                                                                                                                                   

  • Monday – Richard Schulze, founder and former Chairman of Best Buy, offered to take the company private for approximately $8.5 billion.
  • Tuesday – Eric Rosengren, president of the Federal Reserve Bank of Boston, called for a large-scale, open-ended bond-buying program to stimulate the economy. Rosengren does not currently have a vote on monetary policy.
  • Wednesday – Data firm Core Logic and Freddie Mac independently reported that home prices in June rose 6.0 percent and 4.8 percent, respectively, from the previous quarter.
  • Wednesday – The U.S. Department of Labor reported quarterly worker productivity was up 1.6 percent, while labor expense was up 1.7 percent.
  • Thursday – The National Association of Realtors said home values increased in the second quarter in 75 percent of cities, compared to a year ago.
  • Thursday – The U.S. trade deficit for June dropped to $43 billion as exports rose and imports declined.
  • Thursday – Jobless claims for the previous week unexpectedly declined by 6,000.
  • Friday – China’s outbound shipments rose just one percent in June, less than expected.

Our Take

U.S. home prices are now rising year-over-year, not just month-over-month. As we’ve said many times, this trend provides a very important boost to the overall economy, creating a viable scenario of respectable U.S. growth even in the face of European recession and a slowdown in China.

What makes the current housing situation especially powerful is the tremendous strength still left in the refinancing wave. While many have already locked in lower rates, millions more will soon receive a “raise” in the form of reduced monthly mortgage payments. Major banks are working through significant backlogs, indicating huge numbers of new refinancings will be processed in the coming months. Many homeowners can’t yet participate due to a shortage in equity, but if housing prices rise for another quarter or two this restraint will dissipate, unleashing another round of economy-stimulating refinancing. A look at our online dashboard users suggests that about a third of homeowners are still paying more than 5 percent on their mortgage loans.

When the housing market dried up in 2007, it contributed a roughly 3 percent drop to GDP growth. We don’t think the upside from housing alone is quite that high if the recovery continues now, but it could be close.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as the Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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