As We Enter Santa's Rally...
This past week
the Dow Jones Industrial Average, S&P 500, and Russell 2000 Indexes reached new all-time highs fueled to a large extent by favorable economic news.
Specifically, the Commerce Department upwardly revised its GDP estimate for the 3rd quarter to 5.0%, which easily topped the consensus forecast of 4.3%. When combined with the 2nd quarter GDP growth of 4.6%, it marked the largest back-to-back quarterly advances for the economy since 2003.
Other encouraging data included a 0.4% rise in personal income last month with a related 0.6% increase in Personal Spending. As for inflation, measured by Core PCE Prices, it was non-existent at 0.0% and less than the forecast of 0.1%. The personal spending data, along with the University of Michigan’s Consumer Sentiment Survey, show that consumer sentiment climbed to an eight-year high this month, are added signs that consumers are actually believing in the health of the U.S. economy.
In housing news
November existing home sales fell on a monthly basis to 4.93 million from a downwardly revised 5.25 million home sales transacted in October. The consensus forecast had been for a decline from the initially estimated 5.26 million homes sold in October, to 5.20 million homes last month. Inventory levels fell 6.7% in November to 2,090,000 from 2,240,000, representing 5.1 months’ supply. Even though sales declined, they did manage to increase on a year-over-year basis for a second consecutive month. Distressed sales were unchanged from October to November, accounting for just 9% of aggregate volume during those two months.
Meanwhile, new home sales fell 1.6% to 438,000 in November from a downwardly revised 445,000 in October. Also, the Federal FHFA House Price Index for October was reported 0.6% higher, which was better than the 0.2% gain expected. Year-over-year home prices were 4.5% higher. Overall, sales volumes may have been a little disappointing, but the strength in pricing, the limited housing supply, and the low percentage of distressed housing suggests the housing market remains sufficiently strong and resilient to continue on a path of recovery in 2015.
For the week
the FNMA 3.5% coupon bond lost 18.8 basis points to end at $103.95, while the 10-year Treasury yield increased 9.2 basis points to reach 2.25%. Stocks ended with the NASDAQ Composite gaining 41.48 points, the Dow Jones Industrial Average adding 248.91 points, and the S&P 500 rising 18.12 points.
Year-to-date for 2014, the NASDAQ Composite has gained 13.11%, Dow Jones Industrial Average has added 8.18%, and the S&P 500 has gained 11.51%. The national average 30-year mortgage rate increased from 3.86% to 3.91% while the 15-year mortgage rate increased to 3.17% from 3.12%. The 5/1 ARM mortgage held steady at 3.25%. FHA 30-year rates increased from 3.35% to 3.40% and Jumbo 30-year rates increased to 3.80% from 3.73%.
Mortgage Rate Forecast
The FNMA 3.5% coupon bond ($103.95) fell 18.8 basis points last week and dropped down to the 50-day moving average at $103.71 before rebounding upward to the 25-day moving average located at $103.95. If stocks remain strong heading into the New Year, the bond may have a tough time staying above the 25-day moving average and may trade in a sideways direction. If stocks weaken though, the bond could move above the 25-day moving average and resume trading between that level and prior strong resistance at $104.29.
This week is officially the time period known as the Santa Claus Rally, encompassing the week between Christmas and New Year’s Eve. According to the Stock Trader’s Almanac, this small time-frame has historically accounted for a 1.6% jump in the stock market. Yet, the Almanac warns that “Santa’s failure to show tends to precede bear markets.” Jeffrey and Yale Hirsch, the Stock Trader’s Almanac’s authors, also composed a little rhyme that serves as a warning: “If Santa Claus should fail to call, bears may come to Broad and Wall.”
So far, Santa has heeded the call with equity markets pushing to new highs. There seems to be an upward bias for stocks and this may put some selling pressure on the bond market. If this happens, interest rates could edge higher. However, if stocks falter, bond prices could move a little higher and this would stabilize and perhaps improve current rates.
Still, the next big catalyst to impact the stock market and, indirectly, the bond market, will be the next corporate earnings season. Fourth quarter 2014 earnings season kicks off with Alcoa on January 12, 2015.
By: Michael Borodinsky
Vice President/Regional Builder Branch Manager | Caliber Home Loans
Call Michael: 732-382-2654
Email Michael: email@example.com