Still Stumbling Out of the Gate

2016 has hardly gotten off to an auspicious start, particularly if you own stocks.  Through the first two weeks of January, the S&P 500 has lost over 10% of its value. This is the worst start to a new year ever. 

If misery loves company, then the S&P has plenty of it. China's major stock barometer, the Shanghai Stock Exchange Composite, is down 16% year to date. Japan, Germany, and France have also experienced double-digit stock-market declines. In the United Kingdom, stocks are down almost 10%, but not quite. 

Around the world, investments are losing value, and they're not alone. Many asset groups are also losing value. (We distinguish investments from assets, in that investments generate cash flow.) Commodity assets – food stuff and industrial metals – continue to hit new multi-year lows. Then there is oil and natural gas, which also continue to trend lower. Oil prices are at a 13-year low. Though natural gas prices have rallied in recent weeks, they continue to hover near a 15-year low.

Not surprisingly, consumer price inflation (CPI) barely registers a blip these days. CPI for December showed a 1.0% monthly decline, which drops the annual inflation rate to a mere 0.7%. Energy lead the charge lower, posting a 2.4% monthly decline.

Housing continues to be the one positive sector in the economy. Unfortunately, even housing is showing signs of faltering.

Home builders remain optimistic, but just not as optimistic as they were in the second half of 2015.  The home builder sentiment index dropped to 60 in January. This is the third-consecutive monthly decrease.

Lower optimistic could simply be a reflection of fewer starts. Total housing starts for December were down 2.5% to 1.149 million on an annualized basis. Single-family starts bore the brunt of the decline, falling to 768,000 from 794,000 month over month.  Permits were the silver lining (somewhat). Permits came in at 1.232 million on an annualized basis. This beat expectations for 1.2 million permits, but they were still lower than the 1.282 million posted in November.

We've devoted a good deal of space to markets outside of housing and mortgage lending, and for a good reason. No market is an island. (The same can be said for any country.)

Our concern is that what's occurring in investment and asset markets could affect the housing market. Investments and assets produce a wealth effect: When investment and asset prices are appreciating, people feel wealthier and more confident. They're more likely to take on a big-ticket item – like a house.  The flip side is that when investment and asset prices are depreciating, people become more cautious. They're less likely to take on big-ticket items.

We're still bullish on housing, but we're also realistic. We wouldn't be surprised to see a further slowdown in national sales volume. We also wouldn't be surprised to see a slower pace of price appreciation (and even price depreciation) in more local housing markets. 

 Information provided by Jessica Regan.

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