Recent data has supported our macroeconomic view that both global and US economic growth is slowing. The Institute for Supply Management’s manufacturing index fell to 50.2 in September from 51.1 in August. Likewise, their non-manufacturing index decreased to 56.9 in September from 59 in August. Consumer Confidence, as reported by the Conference Board, declined in October to 97.6 from 102.6 in September. In a poll of economists conducted by Reuters, the consensus forecast was 103. Weak economic numbers make it difficult for the Federal Reserve to raise interest rates.
A beneficiary of continued low interest rates should be the housing industry. Yet the Census Bureau’s estimate for New Home Sales for September was 468K, well below the 549K expected. Even the prior two months were revised downward. And, the data was weak across all four regions. We expected that New Home Sales would be a bright spot in the economy, particularly in light of the strength of the NAHB (National Association of Home Builders) Home Builder Sentiment Index, which reached a 10 year high in September, and the NAR (National Association of Realtors) estimate of Existing Home Sales, which are at 93.4% of December 2001 – a benchmark considered to be “normal.” Meanwhile, the United States MBA (Mortgage Bankers Association) Mortgage Purchase Applications index dropped 3.5% in the most recent week.
We hope that the negative news in the official data is statistical noise and that underlying trends are more favorable. Certainly, there are generational factors favoring rentals. Yet, low interest rates favor interest sensitive economic sectors, with housing typically being a beneficiary. The Federal Reserve has been consistently poor in forecasting economic growth. With repeated guidance that they would be raising rates, interest sensitive stocks have not benefited from rates that have remained low by any historical standard.
Anecdotally, builders in our area seem reluctant to build “spec” houses, yet remain busy with custom homes and remodeling. Reviewing company reports of national companies reveals they are having difficulty meeting supply because they cannot find enough labor. Lack of inventory may have held back activity, but the inventory picture is starting to improve. Despite a somewhat higher number of houses for sale, the average time for a completed home to be sold is only 3.3 months, well below the long term average of 5.5 months.
Since more market participants are recognizing that, with slow economic growth, interest rates will remain low for the foreseeable future. We remain constructive on interest sensitive sectors, particularly the housing industry.
- The views expressed are provided for information only and are not to be used or considered as an offer or solicitation to buy or sell securities or investment products. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you consult your financial advisor.
- Data provided LPL Financial and Michael Shaoul.
- All indices are unmanaged and may not be invested into directly.
- The economic forecast set forth in this presentation may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
- Stock investing involves risk including loss of principal.