Stocks Weekly Performance: New All-Time Highs Hit In Subdued Market

Market Breadth: 19 of the Dow 30 stocks rose this week, vs. 27 last week. 56% of the S&P 500 rose, vs. 74% last week.

Economic News:

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“Sales of previously owned U.S. homes declined to a one-year low in August as affordability continued to hamper demand and Hurricane Harvey caused a slump in Houston-area purchases, a National Association of Realtors report showed Wednesday.”

The median sales price rose 5.6% y/y to $253,500

“While decreased purchase activity in Houston helped push down the sales count nationwide, and may continue to do so in coming months, residential real estate is struggling to improve because of declining affordability, NAR said in the report.
Housing data may be volatile for several months in the wake of Harvey and Irma. As a result, U.S. sales in 2017 will probably be weaker than they were last year, according to the group, which plans to issue a revised forecast next week. A pause in both sales and construction in Texas and Florida as clean-up efforts continue will probably give way to improving demand later this year and into next, according to economists.

Even before the storms, home price growth was exceeding wage gains because of lean inventory, crimping affordability for some and leaving buyers with fewer properties to choose from. At the same time, a steady job market and still-low borrowing costs remain sources of support for the housing recovery.

Existing-home sales account for 90% of the market and are calculated when a contract closes. (Source: Bloomberg)
The Federal Reserve announced it will begin reducing its balance sheet, which swelled to $4.5 trillion amid unconventional measures deployed following the financial crisis, in October. Officials believe the hurricanes that have battered parts of the U.S. will have a temporary effect on activity. Most policymakers believe it will be appropriate to hike rates again this year, with only four officials wanting to maintain the current policy rate through year-end, the same number as in June. During a press conference, Chair Janet Yellen deemed the persistent shortfall of inflation from its 2-percent target to be a mystery. (Source: Bloomberg)

The Fed will initially cut up to $10bn each month from the amount it reinvests. It also said it will hold benchmark interest rates steady, and signaled a rate hike by the end of 2017. The move to unwind the portfolio the Fed acquired during its crisis-era bond-buying programs was widely anticipated. (Source Bloomberg).

Week Ahead Highlights: The 3rd quarter draws to a close next week with the market making multiple new highs over the past 3 months, we may see some profit-taking and position squaring as investors lock in unrealized gains made during the 3rd quarter. If that happens, look for some weakness in stocks, bonds, and the euro.

October will be the beginning of a new era, in which the Fed starts winding down its huge balance sheet, slowly drawing liquidity from the market. This will add uncertainty to the market – no one knows for sure how the market will react – even though the Fed’s pace of selling its assets will be glacial at 1st.