Getting Wacky In A ‘Short’ Time – Market Update
Kevin Graham12-minute read
February 01, 2021
In many ways, 2020 was a deeply unsettling year for the world in general. Yet, through it all, nothing seemed to faze the stock market. One month into 2021, it’s hard to believe that the thing that would finally throw a wrench into things involved GameStop stock and a bunch of people on Reddit.
Yeah, it’s been a wild last week or so especially. Before we get there, let’s discuss some of the hard data that’s actually based on activity on the ground.
As usual, this portion of our report is put together with the assistance of Econoday.1 Let’s dive in!
Consumer Price Index (CPI)
Overall inflation was up 0.4% on the month and 1.4% on the year for consumers as of December. When food and energy were taken out of the equation, prices were up 0.1% and 1.6% overall since last December.
Among the key drivers last month was an 8.4% uptick in gas prices. However, that’s still down 7% from the end of 2019. Food prices were up 0.4% as both the cost of food at home and away from home were up by that amount. Prices for food have increased 3.9% on the year.
Shelter prices were up 0.1% as with the cost of rent and what the equivalent rent would be for a homeowner if they were to rent out the same space.
Producer Price Index (PPI)
Producer prices were up 0.3% for the month of December and 0.8% since the end of last year. When food and energy were taken out, prices were up 0.1% and 1.2% overall on an annual basis. When further excluding retail and wholesale trade from production prices, inflation was up 0.4% for the month and 1.1% for the year.
Despite an increase in inflation last month, year-over-year gains were flat for the month at 0.8%. This steadies the pace of appreciation. There was a 5.5% increase in energy prices, but it’s still negative for the year. Meanwhile, food prices were up 1.2% since last December after rising 0.1% to end the year.
In the first of a couple signs that we’ve got a long way to go, retail sales were down 0.7% in December. Given that it was the holiday season, that’s typically a banner retail month. It just wasn’t a good holiday shopping season for retail as this follows a 1.1% drop in sales from October to November.
Vehicle sales were up 1.9% or it would’ve been even worse. Without vehicles, overall retail sales would have fallen 1.4%. Gas sales were up 6.6% as well and when vehicles and gas were taken out, the overall drop was 2.1% with a 2% drop in a control group not as affected by seasonality.
It wasn’t a total wash. Sales at clothing stores were up 2.4% although these were down 14.1% on the year. Building materials sales rose 0.9% in yet another sign that the housing market is very strong. Moreover, total sales are up 2.6% since February and have risen 9.5% during the pandemic. There’s been a 16.9% increase in e-commerce over the same time period.
Industrial production was up 1.6% in December as manufacturing increased 0.9%. Moreover, capacity utilization in factories was up 1.1% to 74.5%. This is a definite bright spot in the reports that came out.
There was a 1.6% gain in mining to go along with a 6.2% uptick in output at local utilities, no doubt related to cooler weather and holiday lights. There was also a 2.1% increase in machinery production out of the manufacturing sector, which does point to some strength in business investment.
Production volumes are down 3.3% since February, with manufacturing falling 2.4% over the same period and mining down 11.8%. But at least things appear to be headed the right way if you’re trying to read the tea leaves right now.
Housing Market Index
Builder sentiment pulled back again in January, but it’s still incredibly high right now at an overall level of 83. Among the components, present sales were down 2 points to 90, while sales expectations over the next 6 months were also down a couple of points to 83. Finally, traffic of potential buyers walking through homes fell 5 points to 68.
While the housing market is still on an incredible roll, it’s worth noting that a push toward higher rates a couple of weeks back may have served as a cooling mister on some of the fiery-hot enthusiasm for builders.
Construction on homes precedes in three phases. Let’s take them in order and see how December shook out.
Permits were up 4.5% overall to 1.709 million annually. Of these, 1.226 million were single-family homes, up 7.8% on the month, with the rest being 437,000 multifamily units. Overall permits for the year were up 4.8% over 2019.
Meanwhile, starts were up 5.8% last month to 1.669 million annually on the single-family side, starts were up 12% to 1.338 million with 312,000 multifamily starts. Overall starts were estimated to be up 7% over 2019, coming in at just over 1.38 million.
Of course, the biggest need in the market is supply now. On that front, there was good news when it came to housing completions which were up 15.9% from November at 1.417 million on a seasonally adjusted annual basis. Single-family home completions were up 10.2% at 984,000. On the multifamily, and the number was 422,000.
Existing Home Sales
Existing home sales were up 0.7% at 6.76 million, having risen 22.2% on the year in December. This was after sales dropped 2.2% in November. There’s just a lot of demand for housing right now. Everyone wants a different home after realizing theirs doesn’t fit now that they’ve spent months there.
Supply is unbelievably tight in the market right now at only 1.9 months, given the current pace of sales. A market is considered in balance between buyers and sellers when there is about 6 months’ worth of supply available. The shortage has driven prices up 12.9% over the course of the year after they rose 0.4% in December to $309,800.
Low mortgage rates driven by uncertainty and the policies of the Federal Reserve seem to be having a considerable impact at the moment, at least when it comes to prices and demand.
Case-Shiller Home Price Index
It may have been a month behind the existing home sales numbers we just went over, but the Case-Shiller index seems to confirm prices are rising in a hurry. In November, the 3-month average of home sales across the 20 cities surveyed was up 1.4%, and 1.1% on an unadjusted basis. Home prices are up 9.1% overall since last November.
It’s worth noting just how high home prices are at this point, the 9.1% yearly increase is the biggest since May 2014. Taken together with the Federal Housing Finance Agency (FHFA) data we’ll see below, it could be enough to make anyone looking to buy recalibrate how much house they can afford.
FHFA House Price Index
There are a couple of differences between the FHFA index and the one that comes from Case-Shiller. For starters, it looks at home prices across regions of the U.S. rather than picking major cities. It’s also not a 3-month average in the way the other index is. Finally, this only looks at conventional loans.
However, both tell a similar story of a housing market with incredibly high prices. Overall prices were up 1% in November and there was a record high of an 11% pace of appreciation over the same time last year. This is great for sellers, while buyers might be trying to keep up.
Consumer confidence in January came in at 89.3. This was up 2.2 basis points after December numbers were revised down slightly. It’s a tale of two reports.
Current conditions didn’t look so good to consumers for the job market where more people were saying jobs are hard to get, up 0.9% to 23.8% while fewer people see jobs as being in abundance, down 0.5% to 55.6%.
However, in the next 6 months people expect to see more jobs open up with 31.3% seeing more jobs ahead, up from 28% in December. Meanwhile, not as many people see fewer jobs opening in the future, as this opinion was down 0.8% to 21.4%. At the same time, fewer people expect an increase in their income to go along with those job openings. This number was down 1.7% to 14.4%.
In other readings, expectations for the stock market are about evenly divided between those who believe it will be going up and those who see it probably dropping in the near future. Finally, near-term buying plans for homes and cars are both up.
MBA Mortgage Applications
Mortgage applications overall were down 4.1% last week, but refinance applications were up 83% beyond where they were a year ago and the purchase volume reported was 16% higher than last year.
The average rate for a 30-year fixed mortgage with a conforming loan balance was up 3 basis points to 2.95% with 0.37 points paid and a 20% down payment. Meanwhile, jumbo 30-year fixed loans with 20% down payments and 0.31 points paid saw rates increased to 3.19%, up a couple of basis points from 3.17% the week prior.
Durable Goods Orders
Durable goods orders were up 0.2% in December to $245.3 billion. When transportation was taken out, orders were up 0.7%, and orders of core capital goods were up 0.6%.
Transportation orders were down 1% in December. Overall new orders of durable goods were down 7% compared to 2019. Unfilled orders were down 0.3%, but shipments were up 1.4%.
In addition to the good news in the report from a core capital goods perspective, November numbers were also revised up to a 1% overall increase. Shipments of machinery were also really high, up 0.8% to help fulfill a 2.4% increase in new orders. As noted earlier, that could be a good sign for business investment.
Gross Domestic Product (GDP)
The economy grew at a rate of 4% overall in the fourth quarter according to the first estimate. However, this is a serious slowing of growth compared to a 33.4% growth rate for the third quarter market, personal consumption expenditures rose just 2.5% in Q4.
Gains and expenditures included sizable health care spending increases. Meanwhile, spending on goods was down 0.4% with a fall in food and beverage spending. There were 1.7 points added to GDP from consumer spending to end the year.
Residential investment was up 33.5% as the housing market continued to show massive strength.
On the downside, exports being up 22% wasn’t enough to make up for a 29.5% increase in imports. Exports lopped 1.52% off GDP metrics. Meanwhile, inventories were up, with decreases in retail trade being made up for by wholesale and manufacturing gains. This added 1.04% to GDP. Finally, government spending fell 1.2%.
Overall GDP was down 3.9% in 2020 in comparison to 2019, so COVID-19 definitely had dramatic effects.
International Trade In Goods
On the goods side, the U.S. trade deficit was down $3 billion to $82.5 billion in December. Imports were up 1.4%, but there was a 4.6% increase in exports.
On the import side, industrial supply and vehicle demand were up 6.6% and 6.2%. Meanwhile, capital goods imports rose 1.2%. This tends to be a harbinger of business investment. Meanwhile, consumer goods imports were down 3.2% at $59.3 billion while food and beverages fell 3% from an import perspective.
On the export end, food and beverages had a 10.4% gain. The speculation is that this has a lot to do with China and the trade deal.
New Home Sales
New home sales ended the year at a seasonally adjusted annual rate of 842,000, up 1.6% for the month. The median home price was up 3.5% to $355,900 compared to last December, this is up 8%. Analysts think this number could push even higher as sales are up 15.2% higher than they were a year ago.
In terms of supply, there are 4.3 months given the current pace of sales. Although this is relatively low, it does look good compared to the existing home sales market.
Personal Income And Outlays
Personal incomes were up 0.6% in December. Unfortunately, there are several things at play here, including people losing lower-wage jobs as the current economic turmoil drags on along with higher unemployment incomes from the government. In fact, the amount spent on personal consumption was down 0.2% in December.
Prices were up 0.4% overall in December and rose 1.3% on the year. In core categories alone, they rose 0.3% to finish the year and were up 1.5% since the end of 2019. This remains well below the 2% target of the Federal Reserve.
Pending Home Sales Index
Pending home sales were down 0.3% in December to an index level of 125.5. While this implies some level of weakness for January existing home sales, the market is still very hot with year-over-year growth of 21.4% in this area.
Mortgage rates fell a bit last week according to Freddie Mac. They’ve somewhat settled into a range at this point. While not quite at historical lows, they remain incredibly low. If you’re looking to purchase or refinance, it remains a great environment to apply now!
The average rate for a 30-year fixed mortgage with a 20% down payment and 0.7 points paid in fees according to the mortgage investor was 2.73%. This was down 4 basis points on the week and had fallen from 3.51% at the same time a year ago.
Meanwhile, looking at shorter terms, the average rate on a 15-year fixed mortgage was down a single basis point to 2.2% with a 20% down payment and 0.6 points paid. This has dropped from 3% a year ago.
The stock market possibly hasn’t seen such chaos since Dutch tulip mania. In the past week, we’ve all learned a little bit about short squeezing, which sounds like the latest workout craze. In reality, it’s a strategy being used by traders to wreak havoc in the markets. Whether this is for good or ill depends on who you ask.
We won’t get into it too much here, but if you’re wondering what’s happening, here’s a (very brief) primer.
GameStop is a brick-and-mortar video game retailer. Brick-and-mortar retail has struggled in general, but GameStop is especially susceptible to this because most video games are now sold as digital downloads, hurting its business model.
Knowing this, some major hedge fund traders had taken short positions in the stock. When you take a short position, you’re selling shares you don’t have with the promise to buy the shares at some point in the future. The trader is hoping that the price of the stock goes down between the time they exercise the option to sell future shares and the time they buy the shares the options are based on. If that happens, they’ve made a profit.
This brings us to what happened last week. An investor group started on Reddit noticed that these major hedge funds had an option coming due in which they were going to have to buy the shares. They timed it right and drove the price of GameStop shares up to a high of 400% above the previous trading level last week because as the stock price went higher and the hedge fund investors were forced to buy, the momentum built.
This caused some chaos in the market with a few major online brokerages having to raise additional capital and temporarily halt trading of several securities including GameStop in order to comply with reserve rules from the SEC. Both sides of the aisle in Congress called for investigations.
The bottom line here is that there is likely to be some fallout. And I’m always up for something that’s interesting to follow. The New York Times has a good explanation of what happened if you want to read further.
Amid the frenzy, the Dow Jones industrial average dropped 620.74 points Friday to finish at 29,982.62, down 0.8% in the last month. Meanwhile, the S&P 500 finished at 3,714.24. This was down 73.14 points on the day, but up 0.37% in the last month. Finally, the Nasdaq was up 2.93% in the last month despite being down 266.46 points Friday to close at 13,070.7.
If you’re not into all this market stuff, we get it. Here’s a palate cleanser. Many Americans are spending a lot more time at home and everybody’s picked up a hobby it seems. Here are tips to create the craft room of your dreams. Have a great week!
1 Important Legal Notice: Econoday has attempted to verify the information contained in this calendar. However, any aspect of such information may change without notice. Econoday does not provide investment advice, and does not represent or warrant that any of the information is accurate or complete at any time. Copyright 2020 Econoday, Inc. All rights reserved.
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