Okay, enough with the puns. Anyone under the age of 50 probably does not remember the song anyway, unless they are an Austin Powers fan. However, the question is real. Why did we have such a strong stock market rally the last week of the first half of the year? The rally actually lasted most of the next week until the employment report was released. The week before July 4, 2011 was the strongest week for the market in two years.
For two months, stocks were taking a breather and retreating from a strong first quarter. We were in the middle of a soft patch which had enabled oil prices and rates to retreat. Even gold was cooling down … so why the sudden reversal? There are several theories that come to mind.
One is the "dead cat bounce," which is a brief recovery in a declining market. Certainly, bounces are commonplace in down markets, but this one was a doozy! It was more like a “super bounce ball.” The size of the bounce does not preclude the bounce theory, but it makes it less plausible.
Another theory is that we had a confluence of events. The bounce was accompanied by end of the quarter adjustments in investors’ balance sheets, along with lower volumes heading into the July 4th holiday week. Lower volumes can magnify any movement in the markets. Certainly one of these factors—or both—could have magnified the bounce. A quick retreat back would be a factor which supported this particular “super bounce” theory. If this is the case, it may very well be that stocks will retreat by the time this story is published.
Finally, there is a whole other chain of thought. The markets may know something we don't know as of yet. What is that? The markets could be signaling that the soft patch due to temporary factors such as earthquakes, floods and oil shock is over and the economy is ready to march ahead. How will we know if this is the case? The markets are looking for strong earnings to continue in the second quarter. And the markets will need to see some stronger economic reports after the reporting of the employment numbers for June. The employment numbers were written off as disappointing even before they were released. There was some false hope raised by a strong ADP payroll report released the day before the employment report, but that just shows you how hard it is to predict the future. Overall, the stock market’s reaction was not that bad because the news was not expected to be great anyway.
We started to see some positive reports as the quarter ended and July began, and these reports certainly have factored into the stock market rally and the lack of significant negative reaction to the jobs report. These reports included better-than-expected housing numbers and stronger manufacturing data. Some may argue that housing has nowhere to go but up. The bottom line is that we cannot have a stronger recovery without the housing sector. This sector continues to face significant headwinds due to so many homes being underwater which factors into the huge shadow inventory. The weak employment figures only go to exacerbate this issue.
On the positive side, demographics continue to point to the fact that this situation has to turn around at some point. Even slight upticks in the housing market will go a long way to make that point come more quickly.
The bottom line is that the more positive economic news must continue. We must have a recovery to put all of the pieces back together. And again, we will warn those who are watching and waiting that if the economy does indeed begin to heat up, those lower rates, lower oil prices and lower gold prices are likely to be out the window. The week of the enormous stock market rally gave us a peek at how quickly rates can turn around. Your refinance prospects need to be made aware of this and act with a sense of urgency.
Higher rates and oil prices? These numbers should be kept in perspective as well. An uptick in rates would still leave us in the ridiculously low range. Housing will still be incredibly affordable and oil prices did not get that low. Prices in the range of $3.70 per gallon at the pump did not seem like a bargain to me. Higher gas prices have also created headwinds against recovery, as consumers will be spending money at the pump that they could have been spending elsewhere.
Though higher gas prices will hurt the recovery, including real estate, the effects will actually be uneven. Real estate in cities or the immediate suburbs will continue to fare better due to shorter commutes and closer proximity to mass transit. Real estate on the “fringes” will be more adversely affected if oil prices remain near $100 per barrel or move higher. Some industries will actually prosper with higher energy prices. These include hybrid and electric cars and energy-efficient building materials. Therefore, it depends upon where you live and what you do for a living.
Finally, as we head into August, the one area of economic news that is sure to dominate the markets concerns the government deficit reduction negotiations. Europe has spooked the markets a few times—but that would be nothing compared to the USA in default. The bottom line … we need the politicians to act like real representatives of the interests of this country and make hard choices on both sides of the ledger. Anything less could be a disaster for the markets. It is one thing for the state of Minnesota to close down and quite another for us to close down the Federal Housing Administration (FHA) and a slew of other programs. It is unthinkable in tough economic times to add an obstacle we can control when we have faced so many headwinds that were already out of our control.
Dave Hershman is a leading author for the mortgage industry, with eight books and several hundred articles to his credit. He is also a top industry speaker. If you would like to stay ahead of what is happening in the markets, visit www.ratelink.originationpro.com for a free trial. Dave’s NewsletterPro Marketing System can be found at www.webinars.originationpro.com and he may be contacted by e-mail at [email protected]