By Oren Jacobson, Market Analyst - New Home Star //
The stock market has gone a little nuts in the last couple of weeks. Just in case you have any questions about what happened, or have customers making inquiries about it, I thought I would use this month’s column to outline what has happened. After a quick overview, I’ll move on to some things we should all be watching in the economy.
The simplest explanation for what occurred is that fears of inflation (price increases exceeding wage increases) spooked the market. We want to keep inflation aligned with wage increases, otherwise, total buying power goes down which can lead to a recession. As a result, fears of inflation led to a sell-off and sometimes once the selling starts it just continues.
Some people have asked me if this was surprising? Not really, though the timing is surprising. If you listened to the New Home Star podcast we did on taxes, I suggested that in the mid- to long- term there were potential risks of implementing a tax stimulus at a time when unemployment was so low. The government usually does not do stimulative policy when the economy is at or near full capacity because if the economy is at full capacity, additional spending can lead to increases in demand. These demand increases push up prices (basic supply/demand). If prices rise faster than wages, we have excessive inflation which reduces buying power, hurting the economy. Many macro-economists signaled concerns about inflation but were expecting it to become a reality at the end of 2019 or the beginning of 2020. Hence why the market reaction was not a surprise, but the timing was.
How bad has it been? Over the last couple weeks, we've lost about two months worth of gains. However, the Dow has gone from about 18,000 (in November of 2016) to 26,000 before this recent dip and we're still near 24,000 as of this writing. Relatively, this is not bad at all. If this begins being brought up, remind people that stocks fluctuate frequently. The market grew by more than 20% last year and we're still way up over the long haul. Unemployment is at 4.1%, housing supply on the market is low, and jobs keep getting added to the economy at a steady clip. Use that as a plug to remind your new home buyers to be long-term investors because that’s the only way most people will win.
Though the change has come sooner than expected, it does not necessarily mean there is a problem. Many of the fundamentals of the economy are still strong and the long run trends are good. That doesn't mean we won't continue to see some volatility in the market. It just means that there doesn't appear to be a structural issue, yet. Keep in mind there is a difference between a market correction (which is what this appears to be) and a market shock. A market shock would look much more like a free fall on the stock market and would be followed by job cuts.
However, there are a couple areas I'm watching right now that are of some concern. Mortgage delinquencies have started to climb, credit card debt is climbing, savings rates are falling, and overall consumer household credit has reached more than $13 trillion dollars which is a record. Meaning a lot of Americans aren’t in a position to withstand a major shock to the economy. These could be short-term trends or these could be indicators of a structural issue. It’s simply just too soon to tell.