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US Markets retreated slightly today (2 May) following a minor fall in new jobs for the month and higher European unemployment. A big-picture view, however, indicates that major US economic bellwethers – housing and stock markets – are experiencing a robust recovery.
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Sure, business is not what it used to be and house prices are well below traditional averages, but conversely, US housing affordability is at unprecedented levels. In Atlanta, (one of America’s fastest growing cities), the affordability ratio is 2.8, which means that the average home purchase is approximately 2.8 times the average annual income. Sydney provides a stark contrast, with an affordability ratio of 9.2. Housing in America is unbelievably cheap. Historically housing and the economy have moved in unison. Regardless of swings in momentum and overall market conditions, equilibrium is generally maintained.
As we discussed in yesterday’s TradingKey course, the market oscillates. A key slide from the course tells us that when all appears to be doom and gloom (in any market), this is in fact the point of maximum financial opportunity.
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So where are the US markets on this curve right now? We may have passed the point of maximum financial opportunity but the expansion phase - which will likely span a decade - is only just beginning.
As far as finance is concerned, Wells Fargo - one of America’s only continually profitable banks - continues to dominate the ailing mortgage arena. Wells Fargo owns 33.9% of the US mortgage market, which is THREE TIMES that of its nearest competitor! While some may view this as a high-risk financial approach to the US economic recovery, it should be noted that Wells Fargo is one of the only banks positioned to emerge from this recovery in an excellent financial position. Its flailing competitors, such as Bank of America, have paved the way for Wells Fargo’s dominance as they are in no financial position to increase their position in the US mortgage business. Australian lenders face a much more stable scenario. Australia’s big four banks are in a strong cash position to compete for mortgage business and the Australian mortgage market has not suffered the same cliff-dive as the US.
It’s clear that US property and mortgage markets present value. Business confidence remains high, as does affordability. Competition in the US mortgage market would be fiercer if any of the traditional players was in a position to compete for new business. The strategy for many US institutions is to clear their books of existing loans, rather than add to it. This delayed reaction to improved economic conditions may mean many US lenders will miss out on opportunities to participate in the US economic recovery.
To the markets: The majority of US banks are not high on the priority list for investors, and for good reason. The overall economic situation, however, points towards unparalleled affordability across many sectors of the economy and a US stock-market poised for continued recovery. The future is bright. Get involved!
Stay Ahead of The Game,
Lachlan McPherson
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