We believe the table below is the most valuable chart of the year. As you can see, it ranks economic data across 5 factors: timeliness, revisions, volatility, surprise, and correlation. The reports in red are soft data reports and the ones in black are hard data. Right off the bat, soft data reports have an edge because they usually come out before hard data. On the other hand, you can say they are hampered by the fact that expectations have less information to go by.
For example, the ADP report comes out before the non-farm payrolls report. The ADP report can help alter expectations for non-farm payrolls which makes them less likely to miss estimates. Sure enough, the ADP report has a 1 on timeliness (the best) and a 4 for surprise as it misses estimates handily. The non-farm payrolls report has a 2 for timeliness and a 2 for surprise.
It’s great if a report is timely and has a high correlation.
The correlation metric is based on trailing 12 month EPS, forward EPS estimates,
and the Baa spread. The ISM PMI composite is a winner because it has a high
correlation and comes out soon after the month ends. The January manufacturing
PMI comes out next Monday and the composite (along with services) comes out on
Wednesday. It’s notable how much higher ranked PCE is over retail sales
ex-autos and gas. We will review the pending home sales in this report; it has
a strong composite reading of 2.45.
Election Volatility Coming
We have discussed in previous articles that Sanders winning the Democratic nomination likely isn’t fully priced into stocks. However, the options market is forecasting volatility on February 3rd which is the Iowa caucus. As you can see from the chart below, Sanders’ odds of winning the nomination have been positively correlated with the implied move on the day of the caucus. The options market expects a 1.2% move on that day which is up from 0.7% a couple weeks ago.
In the average of recent polls in Iowa, Sanders has a 3.6% lead. On PredictIt, Sanders has a 63% chance of winning Iowa, an 80% chance of winning New Hampshire, and a 65% chance of winning Nevada. Biden has a 74% chance of winning South Carolina. Sanders sweeping the first 3 states could cause stocks to decline in February.
Home Price Growth Increases
As we saw from the December Redfin data, home price growth
is bottoming. Monthly price growth in the 20 city Case Shiller index was 0.5%
in November which beat estimates and the prior reading of 0.4%. Yearly
non-seasonally adjusted price growth increased from 2.2% to 2.6%. Yearly
national non-seasonally adjusted price growth rose from 3.3% to 3.5%. Big city price
growth is still below national price growth.
The 2 year growth stack in national home prices fell. Specifically,
yearly growth last year fell from 5.3% to 5% which means the 2 year growth
stack was down 0.1%. Price growth will likely improve in the next few months as
comps will continue to get easier.
Looking at individual cities, price growth in Phoenix improved from 5.8% to 5.9% (non-seasonally adjusted). It had the strongest growth. Charlotte is catching up as its yearly price growth was up from 4.8% to 5.2% which was its highest growth since November 2018. Growth in Las Vegas stopped falling for the first time since August 2018 as it rose from 2.2% to 2.6%. The comp was 0.8% easier, so the 2 year growth stack still fell. The 2nd weakest city was San Francisco which had 0.5% growth which was up from -0.5%. The weakest city was Chicago as it had 0.4% growth which was up 0.1%.
Big Decline In Pending Home Sales
The pending home sales index fell 4.9% monthly in December. That was down from 1.2% growth and missed estimates for 0.4% growth. The lowest estimate was 0%. The index fell from 108.5 to 103.2. This was the largest decline since May 2010 and the largest negative surprise in 5 years as you can see from the chart below. Within this report, every region fell. The index was down 4% in the Northeast, 3.6% in the Midwest, 5.5% in the South, and 5.4% in the West. Remember, the South had a big decline in new home sales and the West had a big increase.
NAR’s chief economists blamed a lack of supply for this
drop. He stated, “The state of housing in 2020 will depend on whether
homebuilders bring more affordable homes to the market. Home prices and even
rents are increasing too rapidly, and more inventory would help correct the
problem and slow price gains.” Homebuilders have an opening to build affordable
housing as existing home inventory is low. Existing homes provide competition
for new homes on the low end because they are cheaper. There is less
competition for new homes to deal with since existing home inventory is at a
MBA Applications Spike
Despite the sequential weakness in new and pending home sales, the MBA applications report in the week of January 24th was strong. It has been strong all year. As you can see in the chart below, the purchase applications index rose to the highest level since the 2008 housing bust. The composite index was up 7.2% weekly after falling 1.2%. The purchase index was up 5% after falling 2%. Yearly purchase applications growth was 17%.
The number one rated report according to Lohman Econometrics
is the ISM composite. It comes out on Wednesday. Stocks should face volatility if
Bernie wins the first 3 elections in the Democratic primary like it looks like
he will. The Case Shiller home price index showed higher growth because of
easier comps. Home price growth has bottomed. The pending home sales index
missed estimates widely and fell sharply. The good news is the housing purchase
applications index was up sharply on a weekly and yearly basis. It has been
strong all year.
Read more awesome articles like this one on VintageValueInvesting.com!