The Dow topped 28,000 for the first time in history. Retail sales rebounded in October and the Fed added $68 billion to financial markets. These factors are all helping to fuel market expansion. On a recent edition of the Financial Sense Newshour Jim Puplava spoke with market technician Art Hill and housing expert Ralph McLaughlin to get their takes on the state of the markets. In the Big Picture, Chris Puplava and Cris Sheridan examined signs of global growth, fund flows and how Financial Sense Wealth Management is positing client accounts.
See Housing Market at an Important Inflection Point, Says Ralph McLaughlin for audio.
Market Rally Is Well Supported
Hill, chief technical analyst at Trend Investor Pro, discussed what the technical set up looks like in markets right now. The rally is broad-based as the Eurasia, Europe, Australia ETF (EFA) break out to new highs, indicating everything outside the U.S. is bullish.
At the same time, the S&P 500 is breaking out to new highs. Overall, the market is healthy and is up roughly seven percent from October to early November, though it may only extend on a short-term and then be ready for a small rest.
“We did consolidate from the latter part of July until the middle part of October, and then we started breaking out in the latter part of October,” Hill said. “So we had a rest, followed by the breakout. A classic rule in technical analysis says that because we had resistance in the 3,000 to 3,020 area for the S&P 500, we might come back to that level and test it in a short-term pull back. That's the first place I'd look for support.”
Shift to Risk-On
This year hasn’t been all risk-off. In comparing the first nine months of 2019, Hill pointed out that utilities were the second-best performing sector, followed by staples coming in third. However, technology was still the top performing sector.
On a 30-day basis utilities are down and the sector has suffered recently, though not much money has moved out of the area simply because it accounts for such a small part of the S&P 500. Hill has seen resilience in the offensive financial and industrial sectors, which were muddled for much of 2019.
“When we have financials and industrials hitting new highs, it tells me that market strength is broadening, and that's a good thing,” Hill said.
Improving Market Breadth
There has been a substantial change in 10-year Treasury yields which have come down from 3.25 to almost 1.4. Now, we’re seeing a bounce back toward 1.92 percent.
Pension funds have moved out of cash in record amounts and back into equities causing a divergence in sentiment. Meanwhile, individual investors have been leaving equities and moving into bonds or even cash.
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This may fuel a contrary move higher if individual investors are forced to move back into stocks. Despite concerns about tariff issues and the inverted yield curve, the S&P 500 has been working its way higher since April. Market breadth is also improving, signaling positive support for the market. Many advance-decline lines are hitting new highs, which indicates this is a broad-based advance.
“This rally has climbed what they call the proverbial ‘Wall of Worry,’” Hill said. “It's still in an uptrend. Now as far as how high it can go, I don't like to put upside targets, but I would think with the year-end coming, if people haven't put money to work, they're going to be looking to put it to work before then. That could juice the market even further, especially since we have a fairly fresh breakout.”
Housing Market Strong
The housing market is showing renewed strength. Financial Sense Newshour spoke with Ralph McLaughlin, deputy chief economist with CoreLogic, to get his take on where housing is now, and what we can expect on a long-term basis.
September produced the first positive uptick in home prices in almost a year and a half. Up to that point, home price growth had been slowing though still heading in a positive direction, but at a slower pace.
The 16-month slowing uptrend appears to be reversing, however more data is needed to clarify whether it is a sustainable reversal. Some of the fuel for this comes from falling mortgage rates, McLaughlin said, which peaked a year ago at five percent.
This decrease in mortgage rates is just now beginning to affect the purchasing market. The shift can also be seen in markets that were cooling, like Southern California, Seattle and San Francisco— all high-cost areas.
Most of these markets are seeing price increases again, as lower interest rates have a greater impact in high-cost areas. This represents a reversal, where leading regions are now lagging, and formerly lagging regions are now leading price averages higher.
“Markets at the top this year were either mid-pack or even toward the bottom last year,” McLaughlin said. “Phoenix, Minneapolis and Charleston are all markets that had been bringing up the rear as recently as a year or two years ago. Now those places are leading the country. But a lot of that is due to the pullback from the big expensive markets rather than any major boom happening in these other markets. But certainly, to characterize what we've seen over the last six months, we’ve seen an inflection point in the housing market. It seems to now be stabilizing.”
Demographic Change Good News for Housing Market
Many investors incorrectly feared that the housing market could be headed for another major downturn due to the late stage of the business cycle. McLaughlin said the risk of a bubble right now is low despite the mature economic cycle.
We have seen some people fleeing high-tax states, but overall this doesn’t appear to be affecting home values much, McLaughlin stated. The fact is, millionaire buyers make up a very small share of the housing market. While differential tax burdens do get capitalized into home prices, there really haven’t been any major changes in the tax code over the past year at the state or federal level. So outside of isolated areas, McLaughlin doesn’t see this fueling current trends.
However, there are two large trends that are likely to positively support the current housing bull market over the long-term, McLaughlin stated. For one, the mortgage industry is not as reckless as it was during the housing bubble. The quality of loans is much higher overall, and there is not as much excessive lending, McLaughlin stated. In fact, there may be an argument to slightly loosen—though in a very controlled fashion—lending standards again.
We are at a very important point in the demographic pyramid, where there are a lot of older people on top, only a few in the middle, and a lot of younger people at the bottom. That younger contingent—the millennial generation—is just now turning to home buying en masse. There is a lot of demographic pressure that is starting to release, McLaughlin stated, which is going to fuel the real estate market for years to come.
“Regardless of where we are in the economic cycle, that demographic inertia is going to support the housing market over the next 20 years regardless of what happens,” McLaughlin said. “Unless there's a major world war or a major economic catastrophe, it’s going to be very difficult for anything to rattle that fundamental setup. … We have record low supply. We have a huge demographic structure that's going to support buying going into the future. On top of this, we don't have a reckless lending environment.”
For those seeking to enter the housing market as buyers, McLaughlin advocates following fundamental principles and avoiding speculation. The financial benefits of buying a house come over the long-term. He advises planning to stay put for at least five to seven years after purchasing a home.
“The most widespread benefits of a buying house come from the benefits that accrue from not having to pay rent,” McLaughlin said. “And that takes a while because when you take on a mortgage, for the first three to five years most of your payments are going to interest. … Don't get caught up in treating your house like a stock and try to day trade it. It's something that accrues over the long run.”
FOMO in Full Force
In the Big Picture, Financial Sense Wealth Management’s Chief Investment Officer Chris Puplava said the markets are in a topping process and investors are positioned for a bearish outcome. In October, Puplava called for a limited downside risk and possible upside surprise, which we then saw play out in the markets. He now sees a recovery and expects a reacceleration.
A year ago, capital was moving into money market funds, bond funds, ETFs and mutual funds relative to equities. This indicated that investors were positioning a worst-case outcome. Any positive inflection where news was better than expected would fuel a rise in markets, as investors were caught out of position, Puplava explained.
There is still a fear of missing out in markets. We could see money that poured into money markets and fixed income move back into equities if positive news continues to fuel a surprise move to the upside. Economists and investors became overly bearish, Puplava said. “So any positive incremental news would be a good reason for the market to rally.”
Puplava believes we’ll be in for a repeat of what happened in mid-2016, with economic news coming in more favorably over the coming weeks and months. However, he does not expect a robust recovery. This contrasts with what fund flows are indicating. The current behavior is indicative of what we would see going into a potential recession or bear market, as investors move out of risk assets and into more defensive assets.
“When you look at the growth rates in terms of returns that you see in risk assets, they tend to be correlated with the growth cycle,” Puplava said. “This means that during the business cycle, you might have periods where growth is accelerating and then decelerating, but it stays positive and never goes into negative territory. This is essentially the economy inhaling and exhaling. … When growth accelerates, equity returns accelerate, and vice versa. … If we believe that the growth rate in the U.S. economy and global economy is beginning to stabilize and may begin an upturn, we are also expecting that returns in the market are probably going to be improved compared to the last year and a half.”
To listen to this podcast, see Housing Market at an Important Inflection Point, Says Ralph McLaughlin , or for a full archive of past shows, visit our Financial Sense Newshour page.
Written by Ethan D. Mizer
