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Rising Investor Confidence

Last update on: Jul 19 2021

A little more than a year ago on February 9, 2016, the global economy and markets hit an important turning point.

You might remember that in early 2016, global markets, other than for government bonds, were in steep decline. Investors were convinced that we were on the cusp of a deflationary decline. China had a list of troubles, not the least of which was a steep bear market in stocks. U.S. corporate earnings were in the middle of what became eight quarters of declines before they finally increased in the last quarter of 2016. About a third of global government bonds were on their way to negative yields.

That’s a steep contrast with recent events.

U.S. stock indexes hit a series of record highs. The S&P 500 has gone more than 90 trading sessions without a decline of over 1%. The list of records and positive results is extensive.

The commodities markets that were signaling deflation very strongly in early 2016 are nowhere near those levels now. Oil more than doubled from its low point. Copper is up at least 40%. Other commodities also have substantial returns.

Interest rates and inflation also reversed course. Far fewer bonds sell at negative interest rates. Interest rates in the United States are well above their lows of July 2016, and the Fed is talking about three interest rate increases in 2017. The Consumer Price Index over the last 12 months is 2.5, marking its highest level in a long time.

Confidence levels for both households and businesses in the United States are at very high levels and have been climbing since the election.

Investors and analysts were too pessimistic in early 2016. Are they too optimistic now?

A lot has to go right, or continue to go right, for recent market trends to continue. For example, earnings growth of 10% or more already is forecast for 2017 and 2018 and is largely factored into stock prices. Even if growth continues or increases, stock valuations are very high. It doesn’t take much to derail a highly valued stock market.

For example, continued increases in commodity and consumer prices could push interest rates higher to a point that investors decide it is time to revalue stocks. That’s just one possible scenario of many.

I’m not forecasting the future. I am saying that today there are many more plausible scenarios for the next year or two than usual. In other words, a lot could happen, and there is no good way to narrow down the more likely scenarios at this point. Instead, we’re staying balanced and diversified. We’re holding investments with solid margins of safety and investing with recent trends. When we have solid new information, we’ll adapt and adjust.

The Data

Existing home sales registered a large and unexpected 3.3% increase in January. Existing home sales lagged new home sales through much of 2016. The increase puts sales at the highest level since February 2007. Even better is that single-family homes increased 2.6% and are up 3.7% over 12 months. Strong single-family home sales are considered a better sign of solid economic growth than condo sales. The sales increase came despite a continuing small supply of inventory and was accompanied by a 1.9% price decline. (Prices have increased 7.1% over 12 months.)

New home sales data will be released tomorrow.

There was another month of solid gains in home prices, according to the FHFA House Price Index. The index rose 0.4% for the month and is up 6.2% over 12 months. This index has shown higher rates of increase than others. The FHFA index uses only prices of homes that qualify for Fannie Mae or Freddie Mac guarantees, so it excludes homes priced above the ceiling for guaranteed mortgages.

The Index of Leading Economic Indicators had its second consecutive strong increase, rising 0.6% after a 0.5% increase. The index attempts to forecast six months ahead. The components for current conditions registered only 0.1%.

The PMI Manufacturing Index midmonth flash dropped a little to 54.3 from 55.1. That still indicates solid growth.

The midmonth flash for the PMI Service Sector Index, which now is released at the same time as the manufacturing flash index, declined to 54.3 from 55.0.

New unemployment claims increased by 6,000. But the four-week average now is at the lowest level since July 1973.

The Markets

The S&P 500 rose 0.60% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 0.79%. The Russell 2000 lost 0.01%. The All-Country World Index returned 0.58%. Emerging market stocks added 0.99%.

Long-term treasury bonds reversed some of their recent losses, gaining 1.09%. Investment-grade bonds rose 0.69%. Treasury Inflation-Protected Securities (TIPS) returned 0.40%. High-yield bonds also returned 0.40%.

The dollar gained 0.03%.

Energy-based commodities declined 1.03%. Broad-based commodities fell 1.87%. Gold rose 0.93%.

Bob’s News & Updates

My latest book, the revised edition of “The New Rules of Retirement” was a big hit at the MoneyShow Orlando and continues to generate high ratings on Amazon.com.

I was quoted on forbes.com recently, discussing state retiree tax havens.

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