Economic update for the week ending November 12, 2016

Stocks surge following election results – It was a bazar week for both stocks and bonds. If you recall, stocks fell sharply after The FBI director reopened the email investigation as investors began to fear uncertainty as Hillary Clinton’s lead tightened. That week stocks dropped every day, as investors stated they were unsure of what a Trump presidency would mean for the economy. On Sunday when the FBI again revealed it found no new evidence that would change their earlier decision stock futures rebounded and stocks improved Monday and Tuesday, as all polling pointed to a win by Clinton. Polling organizations had her at a 82% favorite. As election results came in and it became clear that Trump was about to pull off a surprise victory stock futures dropped significantly. At one point Tuesday evening DOW futures were down 800 points. There was some speculation that the DOW could drop 2,000 points and then recover, mirroring what happened following the Brexit vote. That speculation was wrong and stocks opened just slightly down and ended the day Wednesday up sharply, followed by rallies Thursday and Friday. By week’s end the DOW gained about 1,000 points, closing at an all time high with the largest weekly gain since December 2011. The S&P recorded its largest weekly gain in two years. As markets surged, analysts, looking for reasons, attributed investor excitement to expectations of lower tax rates, less regulation ( especially a trim down of the Dodd Frank financial regulation), more government spending as Trump was proposing an infrastructure build up. That said, many analysts felt that the rally may be a little exaggerated, as most are. The DOW Jones Industrial Average closed the week at 18,847.66, up from 17,888.28 last Friday. The S&P 500 closed the week at 2,164.45, up from 2,058.18 last week. The NASDAQ closed the week at 5,237.11, up from last week’s close of 5,046.37.

U.S. Treasury Bond yields jump – As stocks surged investors sold off bonds. It’s common for money to move from the safety of low returns of bonds to more speculative higher returns of stocks when it’s felt stocks will rise. It’s also common for money to move back to the safety of bonds when it’s felt that stocks may fall. This week, as stocks had their best week in several years, bonds had their worst week as bond yields climbed to their highest rates in 3 years. Bond investors also felt that lower taxes may spur economic growth, but lead to higher deficits. They also expect higher government spending based on what has been proposed, may also improve the economy. Analysts feeling is that, while an improved economy is good it leads to higher inflation rates and would change The Fed’s plan and lead to more dramatic rate hikes. Some experts feel that all this speculation in both stocks and bonds are exaggerated. Other experts feel that rates will continue to move up, even if stocks settle down. We will have to wait and see over the coming weeks. The 10 year U.S. Treasury Bond yield closed the week at 2.15%, up from 1.79% last Friday. The 30-year U.S. Treasury Bond closed at 2.94%, down from 2.56% last week. Mortgage rates follow bond yields so we watch bond yields closely.

Mortgage rates rise to highest levels in 3 years – Rates surged as bond yields and stocks rose sharply following the election results. Rates on just about every mortgage product increased over 1/4%. By Friday the 30 year fixed rate was close to 4%. The Freddie Mac Primary Mortgage Survey which was released on November 10, 2016, showed that average mortgage rates from lenders surveyed for the most popular mortgage products were as follows: The 30-year fixed rate average was 3.57%. The 15-year fixed average rate was 2.88%. The 5/1 ARM average rate was 2.88%. Unfortunately, this survey was last Wednesday, November 2 to Tuesday, November 8. Rates surged after the survey period, so rates will be about 1/4% higher in next week’s survey based on where we were at the end of the week.

California housing affordability unchanged in 3rd quarter – The California Association of Realtors reported that 31% of California households could afford to purchase a median priced home ($515,940). That was unchanged from the second quarter, but up from 29% in the 3rd quarter in 2015. Although prices were higher this year, wages were higher and interest rates were lower than last year in the 3rd quarter, which increased affordability. Rates look like they will be higher in the 4th quarter so it will be interesting to see where affordability goes. The affordability for a median priced condo of $418,230 was 40%.

Next week we will have California sales figures and prices for October. It will be interesting to see what the data says. We have felt a little slowing, but, that said, we are pretty spoiled by several great years! I’d expect that sluggishness we have felt to be just temporary based on inventory, affordability levels and what experts are saying.

Have a great weekend!