Housing-related stocks have been significant outperformers this year, largely driven by declining mortgage rates. While we don’t see that much room for continued declines in U.S. longer-term yields, our sense is that incoming data on the U.S. housing market will continue to surprise to the upside through this summer. By way of example, we’ve seen shorter-term positive trends in some of our other housing forward indicators, including the NAHB index and mortgage applications.
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From a longer-term perspective, we continue to monitor potential ‘bubbles’ that could turn an ordinary recession into a full-blown crisis. Along this vein, we’re increasingly concerned about corporate leverage, which is now at all-time highs. More specifically, with nearly 50% of the investment grade universe rated only one notch above junk, we believe that many companies have experienced ‘grade inflation’ because their recent performance has been propped up by solid economic growth and low interest rates.
Last night, China released aggregate credit financing for April, which was ¥1.36 trillion ($200 billion). This
compares to consensus calling for ¥1.65 trillion ($240 billion). Notably, credit creation has been very choppy
in recent months. However, on a 12-month rolling basis, credit creation as a percentage of GDP has turned
down once again.
As we discussed in Monday morning’s note, Earnings Coming Back into Focus, following very large downward EPS revisions coming into 1Q earnings season, S&P 500 companies have beaten consensus earnings expectations by roughly 5%. However, top-line results have been lackluster, with companies barely surpassing analysts’ estimates. In addition, management guidance has been very weak this earnings season, with only 17% of the companies providing guidance for next quarter issuing an outlook that has exceeded consensus expectations. The negative-to-positive ratio has also hit its highest level since 1Q16.
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