Market Insights

Market Insights: September 28, 2015

Economic Outlook:  Welcome Home?

  • At the peak in 2006, real estate construction was 8.9% of U.S. GDP. The contraction in the Great Recession of 2008 to 2009 decimated single family home prices and the spillover effect on the consumer deepened the recession.
  • It has been a slow road back for the industry. In 2014, real estate construction had rebounded to a point that made up 6.0% of U.S. GDP. It is back to a level that is providing significant economic contribution to GDP. That has been welcome support for the continuing economic recovery.
  • We highlighted the Homebuilders Index in our previous week’s comments. Further confirmation last week was the fact that New Home Sales came in at the highest level since February 2008, at 552,000 annual rate.
  • Though slowing a bit in August, the numbers for Existing Home Sales are still healthy and trending higher. Existing home sales reported by the National Association of Realtors came in at a bit lower-than-expected, but still at an 8 year high (sales at over 5.5 million)
  • PMI’s Manufacturing Index “Flash” estimate came in at 53. This is solidly in expansion territory. It has been higher earlier this year, and the softening largely reflects the slowdown related to a pull-back in the oil patch.
  • The consumer numbers remain strong. The updated estimate of 2Q GDP shows +3.9%, up from the most recent estimate of 3.7%. The data is boosted by higher consumer spending.
  • We wrote last week about all the attention being paid to the China slowdown, noting that the spillover effect to U.S. employment and consumption is limited. China is indeed slowing. The most manufacturing PMI number came in at 47. But there is anecdotal evidence that the Chinese consumer is actually holding steady, a bit surprising. This bears watching.
  • Meanwhile, the Euro-zone’s PMI Composite “Flash” reading was better, at 53.9, suggesting continued moderate expansion in Europe. This continues to represent a confirmation of our thesis that Europe is “digging out” of the mud.

Equity Markets:  What’s Going on Here, Anyway?

  • It was a rough week for stocks. By the end of the day on Thursday, we were close to re-testing the correction lows of late August. However, we got a nice rebound across the board on Friday which meant the week finished on an up note.
  • In light of the fact that the Fed chose not to raise rates, this market softness following the Fed no-decision might be a little surprising. What’s going on here anyway?
  • While it was not a big surprise that the Fed did not raise rates, the announcement itself raised some questions. Rather than commenting on the labor market, the Fed pointed more to a lack of inflation, the strength of the dollar and global economic and financial issues as justification for its policy decisions.
  • This shift in the Fed reasoning effectively moves the decision boundary-lines, suggesting a view that the labor market and economy still may not be strong enough to justify a rate increase. The Fed’s statements and decision not to move rates creates some new debate about the direction of monetary policy. This has to be sorted out by market participants and therefore likely perpetuates some short-term uncertainty for all risk assets, including equities.
  • Yellen’s comments indicated the Fed’s outlook had not changed amidst international volatility, but nonetheless changed their GDP projections. When you add these comments to the language in the Fed statement about how they interpret and react to international events, it is understandable that viewpoints of market participants are shifting.

Fixed Income Markets & the Fed:  Bonds Continue to be Relatively Boring

  • Last week, the yield on the 10 Year Treasury note fluctuated further but on balance did not move a lot. At the end of the week, the yield on the 10 Year closed at 2.16%. It closed the previous week at 2.13%.
  • Bonds continue to be relatively boring, after some high yield and investment grade spread widening earlier this year, rates have remained in a pretty tight range.
  • Janet Yellen spoke Thursday and indicated a 2015 rate hike is still in the cards, referring to the decline in the unemployment rate and an expectation that some of the current economic headwinds may fade. She offered some worry, however, that weak U.S. exports might act as a restraint on U.S. growth.
  • Yellen, however, referred to risks associated with low rates, including excessive leverage and risk taking, and indicated she believes the best strategy “is to begin tightening in a timely fashion and at a gradual pace.”

The Week Ahead


  • U.S., Pending Home Sales (National Association of Realtors)


  • U.S., Conference Board Consumer Confidence


  • U.S., ADP Employment Report (ADP)


  • U.S., Auto Sales (Autodata)
  • U.S., PMI Manufacturing (Markit)
  • U.S., ISM Manufacturing (ISM)