First, I want to congratulate all Americans that have made this cycle the most prolonged economic and job expansion ever recorded in U.S. history. Our people and their work ethic have always been our strength. We are not a bunch of pathetic trolls sitting on Twitter or Facebook calling for a crash every 7 minutes or claiming Americans have been sitting at home since 1945, looking for work but not being able to find a job. We are heading toward the 11th year of this record expansion, and if we make it 12 years, this means a broken clock has more economic game than the American bears.
Before I talk about 2020, we need to discuss first what a difference a year makes.
Last Christmas, the stock market was down by almost 20%. Tariff man tweet fears brought on talk of a mass escalation of the trade war. Also, the Fed hiked rates with no clear indication that they were going to cut them soon. Not to mention, the housing market created a supply shock spike so that some even talked about the peak of housing.
Pretty much everything I said above has changed, so we no longer have a low bar to work with going into 2020.
The stock market is at all-time highs. This means we are vulnerable to pullbacks, perhaps even a 10% plus correction, something that didn’t happen once in 2019.
From Doug Short:
The Trade War Tap Dance that has been with us since the early part of 2018 has calmed down a bit. Our government might draw Europe into this tap dance in 2020.
The Fed has cut rates three times, and global central banks are in stimulus mode. We hardly hear any talk about when the next rate hike will occur.
The monthly supply spike in housing last year that created excess inventory has been coming down to a more acceptable level, which will facilitate growth in housing starts in 2020. Lower mortgage rates did their thing as new home sales picked up. In fact, in May of 2019, I took the housing market out of the penalty box, which means we are back to the same slow and steady cycle for housing.
More on that here: The Best New Home Sales Report Of The Cycle
From Doug Short:
1. Bond Yields
At the end of 2014, I started to incorporate bond market forecasts into my prediction articles. From 2015 to 2019, my projections have followed the same themes.
All my predictions claimed that the 10-year yield would stay within the channel between 1.60% -3%. For me to forecast yields below 1.60%, I would need to also forecast a recession. For me to forecast yields to go above 3%, I would also need to be predicting beyond-trend growth for the economy or currency induced inflation. None of those things were ever discussed in any of my forecasts over the years.
The factors that drive bond market yields are more important than the actual direction of bonds. If people understood the “why” factors better, they would know why I have stuck to this channel and why last year at this time, I had to forecast lower yields.
“For 2019, I am sticking to my call that the 10-year yield will channel between 1.60% to 3%. If world trade gets weaker, we could see the 10-year yield with a 1% handle again.”
“I expect PMI data to fall year over year, which could impact domestic investment slightly, but the economic cycle still has legs to move forward.”
2019 Economic & Housing Predictions
This is what happened: U.S. growth slowed down, PMI data came down, and yields came down once again in this record-breaking expansion.
Currently, the 10-year yield is at 1.88%
For many months on social media sites, I have talked about how important it is for the bond market to close above 1.94% and get follow-through selling. A yield above 1.94% would mean that the bond market has more confidence that we will have higher growth next year. Until then, I would be skeptical of any story that predicts a higher rate of growth for 2020.
Notice in the chart below, how much better the bond market has acted since the 2/10 inverted yield curve.
Any stock market sell-off, correction, or near-bear market can drive money into bonds short term. With many headline-driven risks in play next year, don’t ignore the lower end of my bond market channel just yet. If growth picks up, even just a tad next year, then I don’t expect we will stay under the 1.60% level too long if we see headline risk. This has been the reality in this record-breaking expansion; short-term headline-driven events take us below 1.60% on the 10-year yield. However, we don’t stay there too long because we were never going into recession. Slowing growth took yields lower, but slower growth doesn’t necessarily mean an imminent recession. The failure to understand this has been a plague for the American Recession Bears.
Three different events drove yields under 1.60% on the 10-year treasury in this cycle.
1. 2012 European Bond market scare caused some to speculate that Spain would default.
2. 2016 Brexit scare, that was overkill.
3. 2019 Trade war tap dance and the inverted yield curve
If growth picks up a tad, then yields of 2.21% – 2.42% should be your higher-end targets for 2020. If we get much better domestic investment growth with better PMI (Purchasing Managers’ Index) data in the U.S. and around the world, then a yield of 2.62% is a high target level. To get yields above 2.62%, we need to have a legit higher sustained growth and reflation trade. A lot of variables have to go right for that happen.
Having said that, I recommend sticking with the 1.60% -3% 10-year yield range like I have talked about for years. Focus on the monthly and weekly data in the cycle to get a better direction within the calendar year. Regarding mortgage rates, I expect them to remain in the channel for 3.5% – 4.5%. A yield above 3% on the 10-year yield means mortgage rates could go to 5% but don’t expect rates to go to much higher unless growth here and around the world, pick up.
2. Existing Homes Sales
For 2019 My Forecast was
“I am looking for sales to trend flat to negative between 4.92- 5.29 million with slightly more inventory in 2019, but not a dramatic difference.”
The worst print we had in 2019 was in January when sales came in at 4,930,000, and lower mortgage rates did their thing to bring sales higher. So far, we are barely negative, year to date, for the existing home sales market. In 2019, inventory levels showed year over year increases early on, but toward the end of the year, we were seeing year over year declines in inventory as demand picked up. In 2019, we also broke a year and a half run of the negative year over year prints.
From Doug Short:
For 2020 I am looking for sales to stay with a range of 5,210,000 – 5,470,000 with not much changing on the inventory or sales front unless the 10-year yield breaks over 2.62%. The housing market has a rate of growth issue when the 10-year yield gets above 2.62%, as we have seen twice in this expansion. The good news is that this means the economy is better. Remember, what is positive for PMI data and the economy, facilitates higher bond yields, and this isn’t the best news for housing. When yields get over 2.62%, we do see demand get hit in pricey markets, which can and has led to increases in inventory in this expansion.
One thing that I had been waiting to happen for years now is for cash buyers as a percentage of sales, to fall down to 16%-19%. For years this has been elusive. However, this year we had a few prints in this range. Going forward, if cash buyers fall more, even a tad, we need better growth in purchase application data to offset that loss and grow sales higher. With every new year, focus primarily on the purchase application data on a year over year basis only and put a lot of weight on the data from the 2nd week of January to the first week of May.
In 2019 I was looking for more negative prints in the real term than in 2018. We got that, but only by one week. The negative prints all occurred during the heat months. As rates got lower and lower, the demand got slightly better, thus taking the existing home sales market to almost flat growth in 2019. We still have one more report that could increase the 2019 existing home sales total to flat or even show growth.
From Calculated Risk:
3. New Home Sales & Housing Starts
New home sales had a solid year, even though single-family starts are still a negative year to date. Housing starts in total, passed through the negative into the positive territory at 0.6% growth. We had to get rid of the excess housing supply to see growth again in housing starts.
The best part of 2019 was getting rid of the excess supply of housing. This was the irony of the so-called inventory crisis, but I digress.
The most critical housing data line we have in America got a lot better in 2019.
Monthly Supply, which looked headline recessionary, got back down to a level that can promote slight growth for housing starts. It wasn’t just higher mortgage rates in 2018 that slowed growth. We also had a lot of uncertainty with the trade war tap dance and the Fed back then. Additionally, the government was on the verge of a shutdown. Thankfully Mr. Bridge Loan Man (Wilbur Ross) saved the federal government workers, and the government shutdown stopped in 2019.
For the new home sales market, I expect a 2.3% – 4.7% growth next year. Everyone needs to be mindful of rising yields in this sector. Unlike the existing home sales market, which didn’t see a monthly supply shock spike, the new home sales market is sensitive to higher yields. With yields of 1.60% -2.62% new home sales have been stable in the past few years, but over 2.62%, sales tend to slow.
Unlike in the earlier years of the expansion, when the housing market had a low bar with which to compare future sales and starts, that low bar is rising. If you want growth in housing starts, we will need a combination of more new home sales and monthly supply to stay below 6.5 months. For 2020, as long as yields remain low, this can happen in a slow but steady fashion.
From Doug Short:
4. Home Prices
One of the best housing data lines we had in 2019 was that real home prices went negative year over year. I know this might seem odd to some, but negative real home price growth is precisely what the doctor ordered, and if we can just stay around here for years to come, it would better for the housing market.
From Doug Short:
For 2019 I said: Home prices still have legs to go higher in 2019, but the rate of growth is slowing.
For 2020, I am looking for nominal home price growth between 2.7% -3.4%, which means real home price growth should have some negative prints in 2020. Lower mortgage rates have improved demand enough recently to show some falling year over year inventory data. This means prices have legs to go higher. I would regard nominal home price growth over 4.6% to be harmful to housing long term.
If you’re paranoid about a 60%-70% housing bubble crash, I refer you to my 2019 Housing Bubble Article, which shows why this bubble talk is a bunch of hot air.
Housing Bubble 2019?
5. Economics & Recession Watch
2019 was a decent year in many respects. Economic growth slowed as it should have but nothing too dramatic in context with this record expansion.
In 2019 I was looking for job growth to slow noticeably, but still stay is a very healthy range.
“I expect job creation numbers to fall but stay in the range of 137,000 – 157,000 per month.”
However, year to date, the job data is still outperforming in my mind, running just at 179,727 jobs per month. We have one more report left, and the 3-month average is running at 205,000.
A lot of my focus for 2019 was on the PMI data.
“Keep an eye on the PMI data in 2019. Since America PMI data was good 2018, it has the most room to fall with falling oil prices now. Keep in mind that we already had a manufacturing recession when oil prices crashed a few years ago.”
Now going into 2020, PMI data has stabilized, but can growth re-accelerate? Global central banks are in stimulus mode, but does the trade war tap dance keep individual companies from running at a higher capacity?
From Doug Short:
From Doug Short:
I am looking for 2.1% -2.3% GDP growth in 2020 as consumers still do their thing. We have upside potential for growth next year if domestic investment picks up. However, the trade war tap dance, the Boeing situation, and the 2020 election might hinder some investment due to lack of clarity. The government can step in and provide some domestic investment like some states have done in 2019, with some construction stimulus spending. However, for now, we just have a lot of question marks in 2020.
I expect job numbers to fall to 98,000- 124,000 once you exclude census workers from the data. The job markets look very healthy. A question I ask my economic bear friends is: Can the U.S. economy have a significant job loss recession when job openings are above hires? To my bearish friends; let openings go below hires before you get all American crash on us. Remember that jobless claims have formed a bottom in this cycle but are really low.
From Doug Short:
From Doug Short:
Recession Watch! My favorite
I look for six different recession flags to be raised before I go on a recession watch. If and when those events occur, then we can get into a useful economic discussion about a recession. We have seen three of the six flags already.
1. The Fed starts to hike rates.
(Easy one, the Fed hikes rate when the economy is on better footing)
2. The unemployment rate gets to gets to 4.9% in this cycle.
(Early stages of a tighter labor market)
3. The Inverted Yield Curve. (I know some will disagree with me on this)
My forecast at the end of 2017 was for yields to invert in 2018. I also stated at the end of 2017 that this cycle would have the most extended time from the first inversion to the recession. I believe we inverted the yield curve in December of 2018. We got 3 rate cuts after my inversion. I also considered the inversion itself was as a bullish event for the U.S. economy.
More on why the inversion was the unsung hero of 2019:
Specific Stock Traders Should Stick To Stocks Not Economics
The three remaining recession flags have not happened yet:
4. Housing starts fall into a recession. The housing data did have a scare late in 2018, but new homes sales and the monthly supply of new homes got a lot better in 2019. For now, we are good but keep an eye out if yields go higher.
5. An over-investment in the economic cycle creates a big supply spike due to weaker demand, which will drag the entire economy lower. Some are concerned about the amount of corporate credit and leveraged loans in the marketplace, but these factors should not create a recession in 2020. I would keep an eye out on the Auto Sector and commercial real estate. You can have a recession and not have core and control retail sales go negative year over year. This happened after the tech bubble burst.
6. Leading economic indicators fall for 4 to 6 months straight. This hasn’t happened yet.
In 2019 I tried to impart how to interpret this data line. Look at the cone shape activity during the housing bubble years vs. the wave economic action in this cycle. We didn’t have a booming over- investment cycle this time around. PMI ISM data had 11 sub-50 prints (Below 50 means contraction) in this record-breaking expansion with no recession.
From Doug Short:
More on my model here, comparing current activity to the housing bubble years on all aspects.
Recession Red Flag Model Vs. The Housing Bubble
Finally, headline risk!
We have had a lot of events created headline risk throughout this record-breaking expansion.
1. Pre Election and Political Drama
2. Brexit Drama
3. Trade War Tap Dance escalates in China and moves toward Europe
Those who have followed me on social media know why I call this a trade war tap dance. I believe that no one in their right mind would start a long protracted escalating trade war in this day and age. If we were serious about tariffs, we would simply implement them and not talk about making deals. We would let the duration and the pain of tariffs change the behavior of other countries.
It is important to remember that the President didn’t start this trade war tap dance until the tax cuts were passed. This meant that he knew the risks of starting it and anticipated what it would do to world growth. This also why he screams at the Fed to cut rates, and why he thinks we need negative rates. But negative rates in America are a terrible thing because it means we are in a recession.
More on the Federal Reserve here:
The Fed Being Too Tight is Just Silly
If we did get into a protracted trade war, my mindset would change. However, to this day, I don’t see the US wanting to seriously engage in one.
4. North Korea missile launching drama
5. Prominent people talk about selling stocks due to a recession coming or higher capital gains tax rates, because of a particular President.
Some of these headlines can drive stocks lower and yields to rally to a lower level. However, don’t assume these events are recessionary. Our more fragile friends in this country think every bond rally or every stock pullback means recession.
My point is to ignore the noise and focus on the data. Be the detective, not the troll.
Most people know me as an American economic bear destroyer because I have harped on how the bears don’t base their babble on proper economic models. However, at some point, the U.S. will have a recession, and then we will recover. Ignore the extreme left and right. They went to a place of madness in this record expansion, and I fear they can’t come back.
Understand that the stock market is short term overbought, and a pullback isn’t the end of the world. However, be mindful of the 3 remaining recession flags and look for sectors that can create a supply shock. Once the last 3 recession flags are up, everything changes. If that happens, we will go into another stage of talking about economics.
Follow, math, facts, and data, and if you ever have economic questions, you know where to go.
Happy New Year, everyone!
Below is a link to my interview I had yesterday on Bloomberg Financial talking about housing in 2020
Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data daily on his Facebook page https://www.facebook.com/Logan.Mohtashami and is a contributor for HousingWire.