Existing home sales fell to 4.86 million units, about 2.6% below consensus estimates of 4.94 million units. The report also cited a huge deterioration in median home prices, down to $215,000 or down over 6% from last year. This highlights the bleak outlook for the housing market, as the housing market has yet to find a bottom. With mortgage rates set to only head higher in the coming months, I would expect more defaults on mortgages as there seems to be no slowdown in the turmoil of the housing market.
Weekly unemployment numbers also came in worse than consensus estimates, at 406,000 for the week ending July 19th, 2008. This can only mean bad things for the overall July unemployment numbers that come out next Friday, as some analysts expect the overall unemployment rate to head higher from the 5.5% that was posted in May and June. If you do not remember what happened the last time unemployment increased, just look back and you will see that the Dow lost well over 300. If we really are in a recession, it is also important to note that unemployment during a recession has always hit at least 6%, if not more. Being that the unemployment number is a leading indicator, it seems as though a recession could be imminent, if we are not already in one. That being said it seems even more likely that we will head into a consumer recession as consumers struggle to receive a consistent stream of income without a steady job, which they have become accustomed to over the past few years.
Spending habits will clearly have to adjust for this change in net income per household, which should weigh negatively on the economy, especially for discretionary companies. The further deterioration of the housing market will continue to weigh negatively on financials and home builders until there is a clear sign that there is a turn around in the hosuing and mortgage industry. It also does not help that commodities have had a huge run up in the past year, weighing on corporate profits along with food and energy prices on the consumer. I would continue to recommend staying in traditionally defensive sectors, such as Consumer Staples and Healthcare, as they seem poised to weather the current downturn since over 70% of Staples and Healthcare companies have reported earnings better than analysts estimates. With the strong possibility of a consumer recession, sticking with staple stocks such as Proctor and Gamble PG, Wal-Mart WMT and medical suppliers such as Becton Dickinson BDX, should continue to prove a beneficial strategy as these companies offer dividends and reduced volatility in one of the most volatile markets in years.
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