The downward trend in the markets continued in an eventful week of news, economic data, and earnings announcements. The broader S&P 500 index finished trading on Friday down almost 1.0% for the day and down about 1.6% for the week. The S&P 500 index closed at its lowest levels since November 6th on Friday and has fallen 6.6% since its 2010 highs just less than two weeks ago. Equities did not respond well last week despite President Obama’s first State of the Union address in which he focused on jobs and reviving the U.S. economy. The Fed also held its first meeting of the year in which they kept their target Fed Funds rate unchanged at a range of 0-0.25% while stating that the economy continued to show signs of improvement. The recent correction may be due to some profit-taking and a sign that the market has taken a more cautious approach after posting huge gains since March of last year. The big market mover to keep an eye on in the coming week will be January employment figures to be released on Friday.

The U.S. economy expanded at its fastest pace during the fourth quarter in six years while the Conference Board’s Consumer Confidence Index has increased for three consecutive months to its highest levels since September 2008. Leading economic indicators also point to further improvement in the coming months after rising for the ninth consecutive month in December. However, two major pieces of the puzzle remain in limbo. One out of ten Americans are still out of work while over 17% are underemployed. Labor market conditions will need to show further signs of stabilizing before a true recovery can be considered underway.

The other missing piece is housing. Despite an extended and expanded tax credit for homebuyers and rates remaining at record-low levels, both new and existing home sales posted large drops in December. This is especially worrisome since building permits surged to a 14-month high in December which suggests that inventory levels will rise if sales don’t improve in the coming months. Sales will undoubtedly slow even more after rates move steadily higher as the year progresses and the homebuyer tax credit expires in April so it is even more important that demand picks up during the first quarter of the year.

The Economy
Advance estimates for fourth quarter gross domestic product showed the U.S. rebounding at a faster-than-expected pace. GDP increased at a 5.7% seasonally-adjusted annual rate in the final quarter of the year which is the fastest the economy has grown since 2003. This was the second straight quarter that the economy has expanded which further suggests the economy has stabilized. Final GDP estimates for the third quarter showed the economy grew at a 2.2% clip. A 39.3% jump in gross private domestic investment along with a higher level of export activity and slower growth in imports helped economic growth. Personal spending increased 2.0%, non-residential business spending increased 2.9% while government spending declined 0.2% in the advance report. While the figures are encouraging, the large portion allocated to the restocking of inventory means it is likely not a sustainable pace, and most economists expect growth to slow in coming quarters to a more moderate rate.

The Labor Department reported that initial jobless claims fell by 8,000 filings to 470,000 in the week ended January 23rd. Jobless claims for the previous week were also revised lower to 478,000 from 482,000.

The consumer confidence index increased to a reading of 55.9 in January from a revised December figure of 53.6. This was the third consecutive month that the consumer confidence index has increased and the highest it has been since September 2008. The consumer confidence index is also up from the same year-ago period when it recorded a reading of 37.4.

Housing Market
Home sales in both the new and existing home markets posted considerable drops from November levels. The extended homebuyer tax credit and low mortgage rates were not able to push home sales higher after many buyers rushed into the market before the expiration of the original homebuyer tax credit at the end of November.

New home sales fell 7.6% in December to a seasonally-adjusted annual pace of 342,000 units. December’s drop in new home sales follows a 9.3% plunge in new home sales during November. The seasonally-adjusted annual rate of new home sales in December is now back down to its lowest levels since March. However, new home sales for the previous three months were revised higher by 21,000 units. Median new home prices in December increased to $221,300 from a downwardly revised price of $210,300 in November. Prices increased 5.2% from the previous month but are still 3.6% lower than they were this time last year.

Although sales have been lagging in recent months, new home prices have rebounded back to their highest levels since May. Further price declines may be needed to draw buyers in the new home market going forward with new home affordability roughly nine percentage points higher than existing homes.

In December, new home inventories remained unchanged from the previous month at 234,000 units on a non-seasonally adjusted basis. The number of new homes for sale has not recorded a monthly increase since May 2007. Seasonally-adjusted inventory of unsold homes have declined for 32 straight months to 231,000 units. The slower sales pace pushed months of inventory to 8.1 months which is the highest it has been since June.

After rising to its highest levels since February 2007 in November, existing home sales plunged 16.7% in December to a seasonally-adjusted annual rate of 5,450,000 units. Existing single-family home sales fell 16.7% from last month to 4,790,000 units while condo and co-op sales dropped 15.4% from November levels to 660,000 units. Sales of existing homes are still up 15.0% from the 4,740,000 units in December 2008. In December, the median sales price for an existing home increased to $178,300 from a downwardly revised $170,000 in November. This was the second straight month that existing home prices have increased and the highest they have been since July.

Existing home inventory posted declines for the fifth consecutive month in December, falling 6.6% to a preliminary 3,289,000 units from a revised 3,521,000 units in November. This is the lowest level of existing home inventory on the market since March 2006.

National average mortgage rates declined from the previous week to 4.98% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on January 28th. This was the fourth straight week that average fixed rates have declined and the lowest they have been since mid-December. This was the second straight week that fixed rates have averaged lower than 5.0%. In the week ending January 22nd, the MBA’s seasonally-adjusted purchase index declined 3.30% from the previous week and was down 24.22% compared to the same time last year. After rising for three consecutive weeks, the purchase index recorded its first weekly declined this week since the end of December. Overall mortgage application activity dropped 10.9% over the past week due to declines in both refinance and purchase activity. The refinance share of mortgage activity fell to 67.6% in the week ending January 22nd compared to 71.7% in the previous week.

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