U.S. stocks continued along the path of vacillation, erasing the last three sessions of gains and returning the broad market to last Tuesday’s level.
The press advanced the notion that yesterday’s existing home data, which showed prices down 7% from the year-ago period, was the culprit for the move lower. But this is what needs to occur in order to reduce home-inventory levels that remain extremely elevated – not to mention that this degree of price decline was expected anyway.
Certainly financial shares put pressure on the market as third-quarter losses are now estimated to be larger than previous expectations. However, the losses were widespread, as every major industry group came under pressure – the best performing sector was utilities and even they were down 1.10%; most sectors lost between 1.50%-2.00%.
So it was not all about financials, it was something more. Iran claiming to do away with Israel, again, and Senator Obama’s economic proposal likely didn’t help things either.
Market Activity for August 25, 2008
On the Obama proposal, it seems now that he will not attempt to raise only the top two income tax rates, but the top three as the WSJ reported married couples with taxable incomes of more than $165,000 will see their marginal bracket raised to 36%. This doesn’t just raise the 33% tax bracket (currently the second-highest rate) but also much of those within the 28% bracket. (The range for the 28% bracket consists of married couples making between $131,451 and $200,300). Of course, the top rate would be raised to 39.6% from the current 35%.
This likely caused the market to believe his plans to raise tax rates will be worse than expected. For instance, if the proposal will now raise rates for more than just the two top brackets – which is bad enough as those within these brackets are the main source of capital supplied to the private sector – what’s to say this potential administration will refrain from raising the rates on dividends and capital gains more than currently proposed?
Of course, the more the Obama camp talks this way the less likely they are to actually win, so maybe we should hope they keep talking. Hopefully, no one clues them in on how politicians are not supposed to talk about raising taxes until after they are actually elected. Talking this way is a mistake on their part, and while harmful to stocks in the short-term, it could turn out to be a plus as this strategy is not one that wins elections. Add in that most other countries around the globe are doing the opposite and lowering tax rates such proposals are not only unacceptable, but illustrate a complete lack of understanding over the importance of global competitiveness in the current epoch. And that is what this commentary is all about. It is not about Senator Obama per se, but the harmful effects to our entire economy that such actions would cause.
Then we had the Iranian comments, which are nothing new but do keep geopolitical risks front and center.
I think one could look at all that is weighing on the market – tax talk, housing correction, inflation rising, Iran/Russia – and be fairly surprised the broad market has held up as well as it has. Surely, we could move another leg lower, but the fact that equity valuations within a number of industry groups appear long-term very attractive may just work as a buoy for stocks.
You say buoy? Values are falling! Yes, but we are just 19% from the all-time high the S&P 500 reached on October 9 – with the short-term headwinds the market faces (much of this uncertainty may never come to fruition but it does weigh down), it could be worse if not for reasonable valuations almost across the board.
On the economic front, the National Association of Realtors (NAR) reported existing home sales rose 3.1% in July to an annual rate of 5.00 million, surpassing the consensus estimate of 4.91 million units. The median home price dropped 7% from July 2007, according to the report. (Single-family home sales are down 12.4% over the past 12 months, but up at an annual rate of 4.7% over the past three months, which is somewhat encouraging.)
The combination of tighter lending standards, an increase in foreclosures and potential buyers waiting for signals of a bottom has pushed prices lower.
This is not something the homeowner likes to hear, but it is a necessary condition to reduce the supply of homes on the market, which sit at a record high. This is evident by what has occurred in the West where the pick up in sales has been most striking – prices are down 22% in that region from year-ago levels. Of course, this is an area where much speculation took place as well.
(Note: This inventory measure that has hit a new high includes both single-family homes and condo sales – an increase in the supply of condos was due to projects started 12-18 months back. In terms of just those defined as single-family homes, the inventory figure did tick down to 10.6 months’ worth – a 3.6% decline from the prior month.)
We’ll point out even as existing home prices have declined 7% over the past year – and will fall at least a bit further as foreclosure rates keep supply elevated – the median price remains 15.5% higher over the past five years and up 5% since July 2004. Point is, with the exception of those that had purchased a home in just the past three years, most are still higher from the point of purchase. Since 1999, the median price for an existing home is up 50.6%.
All that said, this rise in existing home sales is encouraging especially since pending sales have risen 32.2% at an annual rate over the last three months, which may suggest things are beginning to stabilize. We’ll need another couple of months of data still to confirm this, however.
Have a great day!
Brent Vondera, Senior Analyst
The press advanced the notion that yesterday’s existing home data, which showed prices down 7% from the year-ago period, was the culprit for the move lower. But this is what needs to occur in order to reduce home-inventory levels that remain extremely elevated – not to mention that this degree of price decline was expected anyway.
Certainly financial shares put pressure on the market as third-quarter losses are now estimated to be larger than previous expectations. However, the losses were widespread, as every major industry group came under pressure – the best performing sector was utilities and even they were down 1.10%; most sectors lost between 1.50%-2.00%.
So it was not all about financials, it was something more. Iran claiming to do away with Israel, again, and Senator Obama’s economic proposal likely didn’t help things either.
Market Activity for August 25, 2008
On the Obama proposal, it seems now that he will not attempt to raise only the top two income tax rates, but the top three as the WSJ reported married couples with taxable incomes of more than $165,000 will see their marginal bracket raised to 36%. This doesn’t just raise the 33% tax bracket (currently the second-highest rate) but also much of those within the 28% bracket. (The range for the 28% bracket consists of married couples making between $131,451 and $200,300). Of course, the top rate would be raised to 39.6% from the current 35%.This likely caused the market to believe his plans to raise tax rates will be worse than expected. For instance, if the proposal will now raise rates for more than just the two top brackets – which is bad enough as those within these brackets are the main source of capital supplied to the private sector – what’s to say this potential administration will refrain from raising the rates on dividends and capital gains more than currently proposed?
Of course, the more the Obama camp talks this way the less likely they are to actually win, so maybe we should hope they keep talking. Hopefully, no one clues them in on how politicians are not supposed to talk about raising taxes until after they are actually elected. Talking this way is a mistake on their part, and while harmful to stocks in the short-term, it could turn out to be a plus as this strategy is not one that wins elections. Add in that most other countries around the globe are doing the opposite and lowering tax rates such proposals are not only unacceptable, but illustrate a complete lack of understanding over the importance of global competitiveness in the current epoch. And that is what this commentary is all about. It is not about Senator Obama per se, but the harmful effects to our entire economy that such actions would cause.
Then we had the Iranian comments, which are nothing new but do keep geopolitical risks front and center.
I think one could look at all that is weighing on the market – tax talk, housing correction, inflation rising, Iran/Russia – and be fairly surprised the broad market has held up as well as it has. Surely, we could move another leg lower, but the fact that equity valuations within a number of industry groups appear long-term very attractive may just work as a buoy for stocks.
You say buoy? Values are falling! Yes, but we are just 19% from the all-time high the S&P 500 reached on October 9 – with the short-term headwinds the market faces (much of this uncertainty may never come to fruition but it does weigh down), it could be worse if not for reasonable valuations almost across the board.
On the economic front, the National Association of Realtors (NAR) reported existing home sales rose 3.1% in July to an annual rate of 5.00 million, surpassing the consensus estimate of 4.91 million units. The median home price dropped 7% from July 2007, according to the report. (Single-family home sales are down 12.4% over the past 12 months, but up at an annual rate of 4.7% over the past three months, which is somewhat encouraging.)
The combination of tighter lending standards, an increase in foreclosures and potential buyers waiting for signals of a bottom has pushed prices lower.
This is not something the homeowner likes to hear, but it is a necessary condition to reduce the supply of homes on the market, which sit at a record high. This is evident by what has occurred in the West where the pick up in sales has been most striking – prices are down 22% in that region from year-ago levels. Of course, this is an area where much speculation took place as well.
(Note: This inventory measure that has hit a new high includes both single-family homes and condo sales – an increase in the supply of condos was due to projects started 12-18 months back. In terms of just those defined as single-family homes, the inventory figure did tick down to 10.6 months’ worth – a 3.6% decline from the prior month.)
We’ll point out even as existing home prices have declined 7% over the past year – and will fall at least a bit further as foreclosure rates keep supply elevated – the median price remains 15.5% higher over the past five years and up 5% since July 2004. Point is, with the exception of those that had purchased a home in just the past three years, most are still higher from the point of purchase. Since 1999, the median price for an existing home is up 50.6%.
All that said, this rise in existing home sales is encouraging especially since pending sales have risen 32.2% at an annual rate over the last three months, which may suggest things are beginning to stabilize. We’ll need another couple of months of data still to confirm this, however.
Have a great day!
Brent Vondera, Senior Analyst
No comments:
Post a Comment