Post-Election Fallout: What does it mean?

Keeping you updated on the market! For the week of November 10, 2014

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MARKET RECAP Post-Election Fallout: What Does It Mean? A good way to alienate just about everybody is to talk politics. Sometimes, though, you have to. Politics matters. That said, our intention isn't to pass judgment; it's merely to vet the past and gauge the future. As for the past, the last time we experienced an election outcome similar to Tuesday's occurred in 1994. Democrat Bill Clinton was president when the Republicans took control of the House and Senate. From a business perspective, 1994 lead to prosperous times. From 1994 though the end of the Clinton presidency in January 2001, the economy moved steadily ahead. What's more, it moved ahead at a brisk pace. Five and six percent annual Gross Domestic Product (GDP) growth was the norm. Over those years, the unemployment rate steadily declined to a low of 4% from over 6%. The stock market, as measured by the S&P 500 , nearly tripled. Over the same period, new home sales climbed to over 800,000 units annually from 600,000 units. Existing home sales increased to nearly 5.2 million units annually from just over 3.8 million units. As for mortgage rates, they were nearly double what they are today. The 30-year fixed-rate mortgage averaged 7.9% in 1995 and 8.05% in 2000. Despite what seemed to be high lending rates, the MBA's purchase mortgage index doubled over that time. (This is why we frequently downplay the importance of low lending rates when juxtaposed to growth.) Of course 2014 isn't 1994. The past never repeats in detail. 1994 also ushered in the beginning of a technology and productivity revolution driven by the Internet. Those variables won't be repeated. This isn't to say that the political climate at the time didn't encourage growth. It appeared to do just that. One thing is for certain: the purse strings were much looser 20 years ago than they are today. The loan-to-deposit ratio – a measure of banks' willingness to lend soared to 1.05 from 0.85 during the Clinton presidency. Strong economic growth encouraged more rational risk-accepting behavior, which materialized in continually rising loan volume. Rational risk-accepting behavior is less prevalent today. A couple weeks ago, we mentioned how former Federal Reserve Chair Ben Bernanke was unable to refinance his home. Bernanke had recently stepped down as Fed chair. Technically, he was unemployed, even though he was earning more money speaking and writing than he was as Fed chair. The Bernanke story is a one-off anecdote, but we know that lenders (and regulators) are still too risk averse. Risk averse behavior is reflected in today's low loan-to-deposit ratio. Let's hope that changes post election. To be sure, partisanship and acrimony will always exist in politics. But if past proves to be prologue, the partisanship and acrimony will be tolerable if Democrats and Republicans can set the table for a repeat of the 1994-2000 economic era.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., Nov. 12, 7:00 am, ET	None	Important. Recent rate increases have slowed refinance activity. Purchase activity continues to lag.
Retail Sales (October)	Fri., Nov. 14, 8:30 am, ET	0.1% (Increase)	Moderately Important. Declines in furnishings and building material sales are reflective of muted home sales.
Import Prices (October)	Fri., Nov. 14, 8:30 am, ET	1.1% (Decrease)	Moderately Important.Falling oil prices will help hold consumer-price inflation in check.
Consumer Sentiment (November)	Fri., Nov. 14, 9:55 am, ET	86.5 Index	Moderately Important. Sentiment remains optimistic, with more consumers expecting stronger wage growth.

 

Will Interest Rates Ever Rise? We suspect one day they will, but we doubt that day is imminent. We've done an about-face on interest rates compared to our outlook at the beginning of the year. Back in January, we thought the 30-year fixed-rate mortgage would be approaching 5% by now. That hasn't been the case. Today, it appears 5% lies somewhere on the distant horizon. We say that because the Federal Reserve has affirmed that it has no intention of raising the federal funds rate (the important rate banks lend short-term to each other). What's more, the Fed continues to plow money from maturing Treasury and mortgage-backed securities into new issues. Though quantitative easing (QE) officially ended last month, the Fed continues to support the mortgage market. We are still looking at a very accommodating low-rate monetary environment. At the same time, consumer-price inflation remains muted. This means the Fed has the leeway to hold interest rates low. (The Fed had offered a 6.5% unemployment rate and 2% annual inflation as guideposts before raising rates. The Fed has certainly disregarded the former, with the unemployment rate now below 6%.) Maybe interest rates will rise when GDP growth hits 6% annually and the unemployment rate hits 4%, as it did 15 year ago. If that drives the rate on the 30-year loan up to 6%, so be it. We'll take that trade-off any day. Article courtesy of Patti Wilson, American Momentum Bank.