Market Update

In this week's Market Update we look at how efforts to clean up and preserve the Environment affect the US economy.

Market Update


5f468e98April 22 marked Earth Day 2016, a day of celebration of environmental issues. This year, Americans have even more to celebrate. According to the US Department of Energy, over the past year the US has lowered its carbon emissions by 2%. Over the past 14 years, US carbon emissions are down 20%. The reason? Well, it’s not due to carbon emission taxes; nor to the Kyoto Treaty that the US declined to sign; and not from any cap and trade system that would further hamper economic growth. Rather, the credit goes to the incredible American energy boom. As if low gasoline and natural gas prices haven’t given American consumers the best tax cut in years, the Energy Department cites low gas prices as the cause of a major shift in electric utility generation from coal to natural gas. The cost of 1 million BTU’s (British Thermal Units) of natural gas has fallen 75% over the past 10 years (from $8 to $2 per BTU). The price drop has led to a renewed “on-shoring” of energy-intensive US companies (chemical, steel, etc.) which are moving production back to the USA.

And, if lower prices at the pump (and at home), along with a repatriation of jobs weren’t enough, now we find that we are helping to heal the environment as well (this, at a time when the amount of vehicle miles driven are at an all-time high). The mainstream media has given the credit for falling emissions to a tough energy policy and the advent of “green” alternatives like wind and solar, but these alternatives contribute only 3% – 4% of total US energy production. In fact, the American energy renaissance overcame substantial headwinds in the form of government regulations and non-support (for projects like the Keystone pipeline). Still, the results of the energy boom over the past 5 years are quite remarkable. Today, the share of consumer spending on energy goods is the lowest in history. From a recent peak of 6.8% in July 2008, energy spending fell to 3.7% of consumer spending in February (see chart below).

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We all look forward to the day when we can satisfy our thirst for energy with zero emissions. Until the day that no-emission alternatives like wind and solar (and, likely, something we haven’t even dreamed of yet) can adequately handle our energy needs, we should celebrate on this 47th Earth Day that ancient fossil fuels are available, affordable, and doing their part to reduce pollution and carbon emissions.

This was a big week for housing data. Following a large 6.9% gain in February, Housing Starts slid in March. Despite the 8.8% drop in March (to a 1.089 million annual rate), housing starts remain 14.2% above year-ago levels – thanks mainly to a surge in single-family starts. As we’ve highlighted here, the rise in single-family starts over the past year is important because each single-family home contributes to GDP about twice the amount (on average) of a multi-family unit. The multi-family sector jump-started the rebound in new housing construction, and the number of multi-family units currently under construction is the highest since the early 1970s. Starting a year ago,multi-family starts peaked as a share of all housing starts and single-family starts have accelerated. The 12-month moving average of overall housing starts is the highest since 2008.

Permits for new housing construction fell 7.7% in March, but remain 4.6% above a year ago. Single-family permits are up a strong 13.2% over the same 12-month period.

The biggest sector of the housing market, Existing Home Sales bounced back in March, rising 5.1% to a 5.33 million annual rate. Sales are up 1.5% from a year ago. The March jump took some of the sting out of February’s 7.3% slide and, despite the month-to-month volatility in total sales, they remain in an upward trend. Tight supply and rising prices still provide headwinds to sales growth. Despite a 5.9% increase in the March inventory of homes for sale, they are still down 1.5% from a year ago. The amount of existing homes for sale is 4.5 months’ supply. The National Association of Realtors believes that less than 5 months’ supply is considered a “tight” market. Demand for homes was so strong in March that properties averaged 47 days on the market before selling (with 42% of properties selling in less than a month). This is down from 59 days in February.

The median price for an existing home rose 5.7% from a year ago, giving us 49 consecutive months of year-over-year price gains. This is a double-edged sword, as rising prices push lower-end buyers out of the market. However, higher prices should boost supply, as it pushes more sellers to take advantage of higher prices, bringing more existing properties onto the market.

In a last look at US housing, the NAHB index, which measures confidence among home builders, held firm at 58 in April. Readings greater than 50 mean more respondents report good market conditions. One year ago, the overall index was at 56.

Leading Economic Indicators rose 0.2% in March. Growth was slowed by the drop in Building Permits (discussed above in Housing Starts), but six of the ten indicators tracked by the Conference Board rose in March (see chart following). The improvement was led by improving financial conditions, including a rebound in stocks and low interest rates, which helped the index climb for the first time in four months.

Stocks and interest rates moved higher this week (with the exception of the NASDAQ, which was pulled lower by weaker Microsoft earnings). The S&P 500 closed above 2100 for the first time (Tues. & Wed.) since last December and got within 1% of its all-time high before easing off to close the week, despite a mixed bag of quarterly earnings reports. With just under 25% of the S&P 500 firms reporting results thus far, 82% have beat profit estimates, while 59% have beat sales projections.

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The Fed’s FOMC will meet this coming week (April 26 – 27) to discuss monetary policy. There is little chance for a rate hike – despite rising inflation and better economic conditions than existed at the March FOMC meeting. Weekly claims for unemployment benefits remain low. They fell to 247,000 last week – the lowest level since 1973, while oil prices continue to rise.

US employers have hired an average 209,000 workers in the first three months of the year, while core inflation (using the Fed’s preferred personal consumption expenditures (PCE) price index) rose 1.7% for the 12 months ending in February. Boston Fed President Eric Rosengren said this was “much closer to the Federal Reserve’s 2 percent target than were the core PCE readings in 2015.”

The Fed is expected to seriously consider a quarter-point (0.25%) at their next FOMC meeting on June 15th. The futures market currently sees a 25% probability of that happening but, if the economy continues to put another lousy Q1 in the rearview mirror (as it did in 2015), the odds will, no doubt, increase. That said; don’t expect the Fed to be too vocal about their June intentions this week, as they will want to avoid painting themselves into a corner.

For the week:

Interest Rates (5-Yr Treasury): + 15 basis points to 1.36%

Stocks (S&P 500): + 11 points to 2092