Eq: Total Market
While there has been some speculation that the US housing market may be facing a tough period ahead, new data is showing that prices might continue rising. The big worries are that rates will rise quickly, hurting mortgage demand, while at the same time, the new tax package will reduce home-buying because of the lack of deductibility of mortgage interest above a threshold. However, new data shows that housing inventory continues to sink. There are few homes for sale compared to buyer demand, and the building rate of new homes is weak. This means there is much more demand in the market than there is supply.
FINSUM: We are not very worried about home prices, especially in the lower and middle pars of the spectrum. The largest ever US generation—Millennials—is entering the key home buying period of their lives.
Any stock investor, especially those who have been investing over the last twenty years, has noticed that there is a dearth publicly traded companies these days. Years of mergers and acquisitions, combined with a lack of IPOs, means there are many less publicly traded companies these days. Now, in what seems a strong move to change that, the SEC is considering making a new rule that would bar shareholders from suing companies, with all claims moving to arbitration instead. Doing so would eliminate one of the headaches of going public for companies, and would move the relationship between shareholders and companies to something more akin to clients and advisors, where arbitration is the norm.
FINSUM: This is an interesting move, but we do not think it is enough to push companies over the edge to IPO. It might also prove poor from a corporate governance perspective.
There has been a lot of talk lately about a coming US and global trade war. A lot of the focus has been on China, but also NAFTA. Well Bloomberg says the idea of a looming trade war is wrong, because it is already here. Over the last few months the US has already added some stiff barriers to trading with Canada. The moves show that the US is not afraid to throw up tariffs even in trading relationships that are pretty balanced.
FINSUM: Trump and the US government are now taking a very firm line on trade by increasing tariffs and launching investigations into potential violations. We like the idea of the making US trade more fair after years of undermining ourselves, but do have some concerns it could backfire in the long run.
While everyone expects that we will have a recession at some point, and likely a significant correction, one of the big questions regards the depth. The Wall Street Journal has something to say about this issue, as the paper is arguing that the next recession is going to be brutal. The reason why is that the government won’t have as much firepower to stimulate the economy in coming years. That is because the newest tax package will send the deficit surging, and there will not be further room to cut once the recession takes hold, eliminating one of the government’s main weapons in combating recessions.
FINSUM: This makes sense to us. Several weeks back we ran an article where an analyst said he loved the tax cuts, but wished they could have been saved for the next recession. We couldn’t agree more.
One of the big worries that many analysts have about what could end this relentless bull market is the prospect of a global trade war. Nations may turn to constantly trying to undercut one another in a fruitless race to outcompete that could damage all economies involved. Well, the odds of that occurring are looking stronger today as President Trump has just issued a stark warning to China—the US’ largest and most contentious trading partner. The message was the president’s approval of broad tariffs on Chinese solar panels and washing machines. Beijing reacted angrily to the new tariffs, saying it had “strong dissatisfaction”.
FINSUM: We don’t know where to stand on this issue. On the one hand we firmly believe that countries need to and should protect themselves from unfair competition. However, in a larger scope, such efforts can seem more like winning a battle and losing a war.
With the stock market as nuts as it is, there has been preciously little talk about the real estate market. While housing did somewhat dodge a bullet because interest deductions were not entirely done away with in the recent tax overhaul, some think the market is ripe for a big fall. By some indicators, the market is overheated, with hefty price gains and wide optimism, leading some to hear echoes of 2005. However, generational factors seem likely to bolster the market as Millennials age into home ownership and Baby Boomers sell their homes and move into assisted and planned communities.
FINSUM: The market probably won’t fall legitimately until we have another recession. However, given the fact that Millennials (the largest generation) are just entering the home buying age, it appears there will be robust demand for years.