There is a famous maxim in our business from John Templeton: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” However, despite the rise in equities and the very long recovery, there seems to be very little euphoria. According to a recent survey, 29.3% of investors believe the markets will be positive over the next six months (historical average is 38.5%). 35.7% believe the market will decline over the next six months, and 30.5% are neutral.
MORE NORMALIZATION BY THE FED:
To help the U.S. economy recover from the Great Recession, the Fed lowered interest rates and injected cash into the economy by buying U.S. treasury bonds with cash. The Fed stopped injecting cash some time ago, but whenever any of these instruments of U.S. treasury debt matured, the Fed would keep its balance sheet the same by buying more. The Fed has announced that they will stop doing this and let its balance sheet gradually decrease as these instruments mature. This, and the planned rate hikes (the next one likely being December) are the Fed’s attempts at normalizing U.S. fiscal policy (without causing current economic disruptions) and putting the Fed in a better position to help should we face another crisis some day.
U.S. MARKETS EKE OUT A GAIN ON A MOSTLY FLAT WEEK:
There was no dramatic market-moving data released last week as the Fed’s announcements didn’t move things much. For the week, the S&P 500* increased 0.08% (up 11.76% for the year). The MSCI All Country X US* decreased 0.21% (up 19.60% for the year). The Barclays Global Aggregate Bond Index* decreased by 0.26% (up 6.96% for the year). The HFRX Global Hedge Fund Index* increased 0.16% (up 4.31% for the year).
HOME VALUE INCREASING AND MORTGAGE DEBT DECREASING:
The graph belows shows household real estate assets and mortgage debt as a percent of U.S. gross domestic product. Mortgage debt has declined by $1.23 trillion from the peak. Most of the decline has been due to foreclosures and short sales, but some is from homeowners paying down debt. The total value of real estate is moving up and is above the average for the last 30 years (excluding the bubble). Despite these trends since the bursting of the bubble, rougly 2.8 million homeowners in the U.S. still owe more on their house than it is worth. This figure was 3.6 million one year ago.
HOME VALUE INCREASING AND MORTGAGE DEBT DECREASING: http://www.calculatedriskblog.com/2017/09/feds-flow-of-funds-household-net-worth.html; http://www.calculatedriskblog.com/2017/09/corelogic-28-million-homes-still-in.html
MORE NORMALIZATION BY THE FED: https://www.benzinga.com/news/17/09/10082081/fed-maintains-interest-rates-announces-start-to-balance-sheet-normalization; https://www.washingtonpost.com/news/wonk/wp/2017/09/20/in-sign-of-u-s-economys-strength-fed-to-start-reducing-4-5-trillion-balance-sheet/?utm_term=.1946697bb249