Archive for the ‘ Economy ’ Category

Green Light or Caution ahead?

Posted by Abigail M. Huffman, CFA on April 13, 2013 at 2:36 pm

Since the beginning of the year, Health Care, Staples and Utilities have outperformed the overall market

The US stock market has been on a tear in 2013 with the first quarter showing advances worthy of an entire year (average annual returns are 9-10%.)  For the oft-cited overall indices, the year-to-date gains (not including dividends) through April 11th are shown below:

Dow Jones Industrial Average: up +13.4%

Standard & Poor’s 500:  up +11.7%

Nasdaq Composite: up +9.3%

Russell 2000: up +11.5%

Source: Wall Street Journal

With such healthy returns, is it full steam ahead? Or time for the market to take a breather?

Here’s the good news

As noted in my November post, “With consumers becoming more confident, is it time for a positive feedback loop?” , increased net worth from appreciating real estate and improved employment should drive spending, economic growth and stock market advances.  In the last six months we have seen:

  • House prices rebounding to a post-recession high (See latest Case-Shiller) for March 26th.
  • Improving employment numbers.
  • Increased economic activity as measured by gross domestic product along with positive leading economic indicators.
  • More retail investors gaining the confidence to invest again in stocks.  (See Mom and Pop Run with the Bulls)
  • Safe haven investments, such as gold, languishing. (See recent NYTimes article on gold)
  • Stronger than expected corporate earnings.

Is it time for the market to take a breather?

Given this positive backdrop, what are the risks of repeating the “Sell in May and go away” pattern? The last several years, in particular, have seen the stock market advance in the early part of the year through May, and then retreat during the summer months.  While this year’s US economy is stronger than the last few years, what are some upcoming data that bears watching?

This year I am focusing on the following concerns:

  • First, as of April, we are entering the earnings season when companies report profits.  Will companies surprise to the upside despite muted expectations?
  • Also, the defensive sectors, such as health care, staples and utilities are leading the market advance instead of those sectors that usually perform during bullish periods such as materials, technology, industrials.  [Refer to chart of sector performance year to date.] Such market action may be a flashing yellow light indicating “Caution ahead.”
  • Volatility, as measured by the VIX  is at a historically low range around 12-14 (normal ranges are in high teens to low 20’s).  Are investors becoming too confident given the recent robust advance?
  • The US debt ceiling needs to be increased and lawmakers are sharply divided as to how to proceed.  A stalemate – if similar to summer 2011 – could cause the market to retrench.
  • The macro environment has been quiet lately but economies in Europe and Asia are still struggling.

Take the long view

While the market may retreat in the short term, it’s important for investors to keep a long view.  Historically over long periods, stocks have appreciated more than bonds or cash.  And for building a diversified portfolio, stocks are an important component. will keep you apprised of trends in the markets.

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Will Housing provide growth we are looking for?

Posted by Abigail M. Huffman, CFA on October 25, 2012 at 4:52 pm

Looking for growth – Will housing provide it? 

Recent data show that the housing market, while still a lower than historical norm at 2.2% of the economy, is on the mend.  Historically (from 1980-2007), the housing industry’s share of gross domestic product (a measurement of all goods and services produced in a year) averaged 4.5%.[1]  During the housing bubble leading up to 2007, housing accounted for up to 6% for several years.  It has taken almost 5 years to absorb the excess inventory accumulated during the boom years and home prices are finally rising.   Chart 1 shows that economists surveyed were too conservative in their estimates.

Data (numbers in thousands) Survey  Actual


Housing Starts Month vs prior Month



Housing Starts



Building Permits



Building Permits Month vs prior Month




New Home Sales



New Home Sales Month vs prior Month



Mortgage Applications          –


Housing starts, building permits and new home sales have been higher than expected as shown in the table.  Note the difference between “survey” and “actual”.  Source:  Bloomberg

Positive Implications of a resurgent housing sector – jobs, spending, and consumer spending! 

It is reasonable to expect that housing will revert to its average contribution to the economy and has finally started on that path.  How much is an additional 2.3% of our $15 trillion economy?  The Bipartisan Policy Center estimates that the missing 2.3% is roughly equal to $350 billion.  Moreover, the additional jobs that could be created to meet estimated housing needs is almost 3 million jobs.

All this bodes well for a stressed US economy that is seeing decreasing demand for exports due to a slowdown overseas.  Housing could make up for some of the lost revenue. Assuming the housing recovery is sustainable, the ripple through the economy should help stimulate demand for other goods.  And consumers will spend!

Chart 2 shows the upward trend for new home sales.  Source:  National Association of Home Builders

[1] Gross Domestic Product is equal to GDP = C + G + I + NX 

Note: Housing is part of “C


C” is equal to all private consumption, or consumer spending, in a nation’s economy

G” is the sum of government spending

I” is the sum of all the country’s businesses spending on capital

NX” is the nation’s total net exports, calculated as total exports minus total imports. (NX = Exports – Imports)


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