Dollars and Sense: Hot stocks and housing bubbles

Hot and cold. I’ve spent the past month in Manitou Springs, Colo., where I’ve been scholar-in-residence for Summit Ministries. In the high country of Colorado, it is often hot in the day and downright cold at night. That’s been like the economic news of the past few weeks. We’ve got this stock market that remains hot. The S&P 500 set another record high this week. The Dow is near record highs. Yet the economy itself remains cool to cold, depending on where you look. The National Association of Business Economics did a survey of business economists, and the response was lukewarm, at best. The group’s president, Ken Simonson, said the survey suggests GDP will creep along at about 3 percent for the year ahead.

Less reliable. Even though the stock markets were at or near record highs this week, we’re continuing to learn that the stock market has become a less and less reliable indicator of underlying economic fundamentals. The Fed continues to pump money into the economy, and that money is propping up stock prices and—some say—causing another housing bubble. The National Association of Realtors reported Monday that existing-home sales dropped to a seasonally adjusted annual rate of 5.08 million in June. That’s down slightly from May’s number, but it remains well above year-ago levels. In fact, Stephanie Karol of IHS Global Insight, said it’s the hottest market in more than 20 years. You have to go back to 1992 to find comparable year-over-year growth.

What’s wrong with that? That doesn’t sound bad—not if you’re a seller. But what we learn when we look closely at that number is that a lot of that activity is from investors who are buying and flipping houses, or using them for rental properties. The June number being down a bit was actually a good sign that the market is not over-heating, though that news also sent the stock prices of homebuilders Pulte and D.R. Horton down this week, as they lowered earnings expectations.

Speaking of earnings. Second quarter earnings season is winding down, and we haven’t had too many surprises. The markets took note of fast-food retailer McDonald’s, which posted second-quarter earnings and revenue that missed estimates. Caterpillar and AT&T also failed to meet expectations. The Federal Reserve Bank of Richmond reported on Tuesday that manufacturing activity in the Mid-Atlantic region had declined in July. Such regional reports normally don’t move the markets, but this report caused traders to discount the good news that DuPont and Texas Instruments beat earnings expectations. But overall earnings have been a bit better than expected, and that has helped stocks stay at high levels.

The week ahead. It’s the end of the month, so we’ll have a pretty busy calendar next week. On Tuesday we’ll get the consumer confidence numbers. On Wednesday we’ll get the second quarter gross domestic product number. And the number that everyone waits for each month is the unemployment rate, which we’ll learn on Friday, along with more corporate earnings numbers. Earnings season is winding down, and if there are going to be any surprises, it is often at the end of the earnings season that we get them. So the week ahead could be an interesting one indeed.