Is There an End to Our Market Woes?

For a while, stocks looked like they were going to stage a decent rally in February. Alas, a late month sell-off caused major indexes to lose ground for the fourth month in a row. The blame goes to more credit related write-offs at financial institutions and disappointing economic data elevating concerns about a possible recession.

Investors have been worried about sub-prime mortgage problems for several months. Now they are concerned problems will spread to higher quality mortgages. Yet investors are also hoping they will soon see some light at the end of the tunnel. Of course, they know that things could get worse before they get better, but they are hopeful that an end to these problems is very near. Home building stocks provide the best indicator of this hope. Despite the general weakness in equities overall, these stocks have posted year-to-date gains. The evidence, however, suggests that investors’ hopes for a quick recovery are misplaced. The S&P Case/Shiller Home Price Indices, which track 20 major markets, provide plenty of evidence that troubles will continue. According to the most recent figures, housing prices fell from November to December in every single market. They were down on a year-overyear basis in 17 markets.

What is worse, the decline in prices accelerated in all of those 17 markets. Of the three remaining markets that managed to post year-over-year price gains (Charlotte, Portland, and Seattle), the rate of increase in all three decelerated. There is no evidence yet that housing prices are nearing a bottom.

Indeed, they could go substantially lower. Despite the declines experienced so far, prices in most markets remain well above their 2000 levels. For example, housing prices fell 17.5% in Miami during the past year, yet they are still 130% greater than they were just eight years ago. This comes out to an 11% annualized gain over the past eight years. If we assume that 6% is a more reasonable annual rate of appreciation, which is still well above Miami’s historical average, housing prices should have been about 30% lower in December than they actually were.

If falling housing prices are not enough to worry you, take a look at a slew of other economic indicators. Last week alone we learned that inflation is heating up, consumer confidence is falling, durable goods orders are shrinking, and initial jobless claims are rising. Headline inflation, in particular, is scary. The Producer Price Index jumped a full percentage point thanks to significantly higher prices for food and energy. Yet even the core figure, which excludes food and energy, came in at twice the expectation.

Amazingly, some observers took solace in the fact that inflation remains reasonable, at least when compared to the 1970s. But that’s like telling someone who was mugged by a dozen thugs that only half a dozen will participate in the next mugging.

The mere fact that inflation is climbing makes it more difficult for the Fed to react to an economic slowdown by easing monetary policy. Even so, the aggressive rate cuts delivered so far have had no discernible effect. Mortgage rates are at about the same levels today as they were before the Fed started its latest round of aggressive cuts in September. Unless banks begin making loans to borrowers at much lower rates, housing prices will continue to tumble. And unless businesses can access capital at reasonable rates, a recession will be deeper and more prolonged than it has to be.

Comments

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Al "Gork" and his pseudo-science global warming scam crowd will greatly cripple the Western world's economy if allowed to implement the "greenie weenie" carbon offset scam being proposed.

Why don't people consult with geologists and astronomers who have studied the history of our earth and universe. They understand the effect of volcanoes, oil and gas seeps, earthquakes, erosion, etc. solar flares and the earth wobbling on its axis, along with an irregular orbit, on our planet. Man is but a puny puff of wind in a hurricane environment!

This is the real threat to the well being of the stock market and out economy!