I hope you had a happier Thanksgiving than the market did. The holiday-shortened week proved ugly for global markets. Both the Dow and S&P 500 were down sharply. The Dow declined over 1,100 points, its worst Thanksgiving week since 2011. On the week, the Dow declined 4.4% while the S&P 500 declined 3.8%. Oil declined for its 7th consecutive week, closing at its lowest level since October 2017.
There seems to be a consensus forming that the US economy is slowing and could even enter a recession next year. Japan and Germany saw economic contraction in the 3rd quarter, although some are attributing that to one-off components in the calculations rather than a true negative growth rate. China continues to struggle, existing home sales are at their lowest level in four years and home builder sentiment fell to the lowest level in over two years. Rising mortgage rates are playing a key role in declining demand for housing. What’s less clear is whether this is a temporary blip or a sign of deeper problems in the housing market. It makes sense for activity to slow and skepticism to mount as rates rise and consumers adjust to the new rates. The key will be whether buyers adjust to higher rates and sellers adjust to a market with potentially lower sales prices. Higher rates increase monthly payments, limiting what a home buyer can pay for a house. A prolonged slowdown in the housing market would negatively impact consumer confidence, lower peoples’ ability to use home equity to pay for upgrades while higher rates make tapping equity more expensive. Six months ago, a December Fed rate increase seemed like a sure thing. Now, all eyes will be on the Fed next month to see if they continue on their path to normalize interest rates or recognize things aren’t as rosy as people have been believing. I don’t like that Trump has been publicly pressuring Fed Chairman Powell to cut rates, but I think the prudent decision for the Fed would be to hold off on any future increases until the economy stabilizes, even if it appears it is caving to political pressure.
As mentioned above, oil decreased again this week, plummeting 11.3% to close at $50.3+/barrel. Oil is now ~35% off the high is reached in early October. The yield on the 10-yr Treasury moved lower, closing at 3.04% from 3.07% last week. The average rate on a 30-yr fixed rate mortgage sharply declined, moving to 4.81% from 4.94% last week.