Global Macro Strategy
September 29, 2015
Sameer Samana, CFA®, Global Quantitative Strategist
Analysis and outlook for the global economy
- The recovery in housing may help insulate the U.S. economy from global growth concerns.
- This may result in investors returning to assets they sold haphazardly—such as equities.
What it may mean for investors
- We believe that investors should use the pullback in U.S. large-cap and developed-market equities to maintain their target allocations.
Housing May Help Insulate the U.S.
After leading the economy into the last recession, the much-maligned housing industry may get a chance at redemption. Recent fears about global economic growth, especially in China, have thus far failed to dent domestic data. The main reason is that the U.S. economy tends to be reliant on consumer spending and services industries, such as housing. Recent data indicate that the recovery in residential construction is well underway and could help fend off the aforementioned global concerns.
The financial crisis was caused by housing-market excesses, fueled by easy credit access that resulted in an economic downturn as house prices overshot, affordability declined, building activity slowed, and financial conditions deteriorated. Since then, the home-ownership rate has declined as tighter credit and delayed household formation have led to lower housing demand. Recently, an increasing number of signs suggest that we may have seen the bottom in these metrics.
Chart 1. Rebound in mortgage applications is driving sales
Sources: Bloomberg, Wells Fargo Investment Institute, 9/28/15. Data sample: Monthly from Aug. 31, 1999 to Aug. 31, 2015
The most recent data on new and existing home sales show that home sales are at cycle highs and have steadily improved over the past five years. This is corroborated by the number of weekly mortgage applications for home purchases. These applications have rebounded after a temporary setback in 2013 and are at the highest levels since the Great Recession. Interestingly, the increase in demand for mortgages has occurred concurrently with a rise in mortgage rates. This demonstrates that the availability of employment and optimism about the future are starting to override concerns about rising rates. This also should give solace to those who are worried about the economic impact of an upcoming Federal Reserve (Fed) interest-rate increase.
We believe that the demand for housing and the resulting residential construction activity are still in the early innings. Chart 1 shows that both home sales and purchase applications remain lower than at any point in the last cycle. With interest rates still low and home prices well below their prior peaks, affordability remains at healthy levels. Combined with the strengthening labor market—where initial claims for unemployment remain at all-time lows and steady payroll growth continues at solid levels—the underlying conditions should lead to further housing improvement.
The reason this matters is that investors have become increasingly concerned about the pace of global growth in the past few months. One of the often-reached conclusions is that the U.S. economy will be adversely affected and will be the next economy to experience slowing growth. However, we do not believe that this will occur—as the U.S. economy has an important characteristic that should help lessen the impact of global issues— namely that it tends to be a domestically-driven, service-oriented economy. These service sectors include utilities, retail, health care, agriculture and construction. The housing sub-sector is, of course, an important component in the construction industry.
With the housing market starting to improve and demand for homes picking up, there has been an increase in building permits and housing starts. This should help sustain the services area of the economy, which accounts for almost 90 percent of output. If we are right, the recent concerns should dissipate, and investors will return to investments they sold based on misplaced worries—most notably, equities. We see the recent pullback, especially in U.S. large-cap and developed-market stocks, as an overreaction to the intentional rebalancing of the Chinese economy toward greater consumption, along with hand-wringing over the exact date of the Fed’s first rate increase. To us, improvement in housing is just one of the many factors that suggest the U.S. economy is on a self-sustaining path to further growth, and that long-term investors should capitalize by favoring stocks over fixed-income investments.
Sameer Samana is a global strategist for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.
Mr. Samana produces investment advice for the international, commodities, and currencies markets. Prior to joining the international strategy team in 2011, he served in a variety of roles including portfolio manager for the equity portion of Compass ETF portfolios and fixed income trader. He has more than 10 years of experience in financial services.
He earned a Bachelor of Arts in Business Administration with a concentration in Finance from Rhodes College and is a CFA® charterholder. Mr. Samana is located in St. Louis, Missouri.
*As of Sept. 30, 2014
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