What Do I Do Now?

Probably nothing but watch closely, at least your weekly charts. Many of my investments have already stopped out (for gains) this week, as the market weakened a bit, and has been kind of sideways like. 

With recession concerns lingering as soft global economic data is countering relatively upbeat domestic reports, Schwab’s Chief Investment Strategist Liz Ann Sonders offers her latest article, Take Me to Your Leader: Analyzing the Latest Leading Indicators, noting that leading indicators are at a record high, but in a relatively flat trend over the past year. 

Liz Ann adds that manufacturing remains weak, while services/consumer remains healthy; with confidence/employment likely defining whether the divergence persists. She concludes that Citi’s Economic Surprise Index has shot up, but Bloomberg’s Economic Surprise Index of Leading Indicators has not confirmed.

As of this morning, the consumer confidence index had been showing exceptional strength but did fall back unexpectedly in September to 125.1 which is down sharply from a revised 134.2 in August and 135.8 in July. Nevertheless, this index has been trending higher this year in continued contrast to the rival consumer sentiment index which has been slumping noticeably.

From Kelly Evans at CNBC:

There has been a clear loss of momentum in prices since the 2018 highs--which isn't necessarily a bad thing. The last thing anyone wants is another housing bubble a la 2005-07; and affordability was getting pretty bad, especially for first-time buyers. The 20-city index was rising 6.7% year-on-year during its March 2018 peak, according to J.P. Morgan.

So what changed? According to Jefferies, "The deceleration has been driven by high-tax locations and especially for high-end homes." Remember, the 2018 tax cut act limited the state & local tax ("SALT") deductions which hit those households the most. That has coincided with a general exodus out of the highest-priced, top-tier cities and into more affordable ones. The five worst performing cities in July were Seattle, San Francisco, San Diego, Chicago, and New York. Seattle prices outright declined year-on-year.

For now at least, the broader FHFA gauge of U.S. home prices is still showing a healthy (maybe too healthy) 5% annual growth, down from its 7.5% peak in early 2018. And affordability for first-time buyers is still an issue. But for markets where prices are now flat to falling, the potential loss of equity--and population--will create much larger future headaches.