A key macro event of the past week turned out to be last Wednesday’s Fed minutes, which revealed a more dovish sentiment than suggested by the January policy statement. The minutes, at least temporarily, sent the dollar lower and halted the sharp rise in Treasury yields. Several Fed participants expressed concern that sluggish wage growth could continue to hold back consumer spending. Fed officials also worried that market participants were becoming too calendar-focused, meaning investors were trying to guess the month of the first rate hike, and there was little evidence that the Fed was preparing to signal a mid-year move. More surprisingly, though, were concerns expressed about the dollar’s strength being a source of restraint on exports, one of the first direct indications of such concern.
Investors had been expecting Greece to receive an extension to its bailout program and were not disappointed as the country’s new leaders largely abandoned hopes for a large-scale reworking of its rescue package. Under the terms of the temporary deal, Greece will now submit proposals for reform measures to the European Commission, IMF and European Central Bank for review.
For the week, the S&P 500 rose +0.63%, the Dow Jones Industrial Average added +0.67%, and the MSCI EAFE (developed international) gained +1.55%.
Here are the 3 stories this week that rose above the noise:
U.S. Existing Home Sales at Nine-month Low, Supply Limited
Sales of existing homes declined by 4.9% in January and fell to their lowest level since last April, according to the National Association of Realtors. All four regions of the country experienced a decline in sales, even though the 30-year mortgage rate dropped to a 20 month low. Low housing inventories were the main culprit for the decline in home resales. The low supply of homes for sale is limiting the selection of homes to potential buyers and elevating home prices, which is keeping many potential first-time homebuyers out of the market.
Opinion: Six Differences Between Now and Last Time Nasdaq was at 5,000
The NASDAQ Composite currently sits at 4,960, less than 1% away from the 5,000 level it last hit at the top the Internet bubble in March 2000. Many bulls are quick to point out that today’s market is not nearly as expensive as it was 15 years ago. This view is supported by a variety of valuation metrics including P/E (based on trailing 12-month earnings), cyclically-adjusted P/E ratio (CAPE), Price/Sales, Price-to-Book, Dividend yield, and q-ratio, all of which are at significantly more reasonable levels today.
However, using the internet bubble as the standard for market valuation is problematic, as according to many valuation measures, that period’s market top represented the most extreme overvaluation in U.S. history. In fact, if you compare today’s market versus a broader historic sample, you find that the current market is more overvalued than the vast majority of the bull-market peaks of the last century.
Bove’s Mortgage Market Concern
In a recent commentary, the well-known and extremely opinionated banking analyst, Richard Bove, describes his concern that reported losses at Fannie Mae and Freddie Mac have the potential to severely disrupt the mortgage market. In Bove’s view, the private mortgage market has been impaired, potentially permanently, by rules put into place after the financial crisis.
As a result, Fannie and Freddie have continued to play an integral role in the mortgage market in recent years. However, if lawmakers move to limit the growth of Fannie and Freddie to reduce the risks of future losses, in Bove’s view, this would severely disrupt the housing recovery. It is an important issue that warrants close watching in the coming quarters.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.
International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.
