The first week of Trump 2.0 has sent the winds of change blowing across the land. Pleasing some and enraging others. While change is not always welcome it is a necessary part of life. Let’s all hope it works out well for the republic and its citizenry. For the week the S&P 500 gained 107 points or 1.78%, the NASDAQ increased 324 points or 1.65% while the DOW jumped 936 points or 2.15%. The winds of change brought good things to the markets this week.
It’s The Economy Stupid
There’s no shortage of folks exclaiming that the economy is going off the cliff or about to. While there is always something to worry about the economy continues to do quite well. It’s been said, accurately I might add. That residential real estate leads the economy into and out of recessions. The NAR released its Existing Home Sales data for December. Sales rose for a 3rd consecutive month up 2.2% to 4.24 million units annualized, 9.3% higher than a year ago. For the record 3-months of data is considered a trend. This is great news after 3-years of consecutive sales declines. Thanks to CalculatedRisk for the chart.
Other high points from the report, the median price hit a record high of $407,500 in 2024. Month’s supply fell to 3.3, quite low by historical standards. Hard to go wrong with data like this.
Show Me The Money Honey
With market valuations stretched by back-to-back years featuring 20%+ gains. Sharply higher interest rates putting pressure on banks and other financial issues. Solid earnings are as important as ever. Luckily the incoming 4th quarter earnings data is coming in stronger than expected and improving as the days go by. The latest numbers show S&P 500 earnings tracking a 3-year high of 12.7% led by Financials, Communication Services and Information Technology. This will mark the 6th consecutive quarter of improving earnings growth. Revenue growth is also coming in on an improving curve. The Financial sector is showing particularly strong growth. Despite revenue growth weakness for Utilities. The 4th quarter is currently tracking 4.6% revenue growth, a 17th consecutive advance.
What About the Future
The largest hurdle facing the economy at present comes from the commercial real estate sector. In particular office properties. The winds of change blew through this sector in a particularly harsh and unforgiving manner. Following the Covid crisis as vacancy rates surged. On an aggregate basis some 14% of the 3 trillion in outstanding Commercial Real Estate loans are underwater. According to Tomasz Piskorski, a finance and real estate professor at Columbia Business School. This figure rises to a troubling 44% for office properties left largely vacant after the pandemic. Smaller regional banks are exposed to more risk than their national counterparts. Strong earnings and revenue growth will help to mitigate these issues. So will lower interest rates and return to office mandates. As the chart shows compliments of Erica Jiang, Gregor Matvos, Tomasz Piskorski and Amit Seru. The risk is not insignificant, though I doubt it will prove a repeat of the 2007-2009 GFC.
Caleb
Last Week’s Post: Is The Sun Setting On America?
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