The markets and the economy are characterized by some uncertainty and market risk at this time. Oil prices continue to be high at around $69.00 per barrel for the July light, sweet crude on the NYMEX. Gasoline prices are averaging over $3.00 a gallon.
The current state of the housing market data continues to be soft, and this helps to support a potential slowdown in the U.S. economy. Homeowners who were previously seeing their wealth rise with the hot real estate market are now faced with softer prices and declining net wealth. This translates into less confidence to spend, and could trickle through to lower overall spending and impact economic growth.
The subprime mortgage market also remains a concern, as rising interest rates on adjustable mortgages are increasing financing costs and, in many cases, are forcing some homeowners to default and foreclose on their mortgage. I expect this negative trend to continue, as there remain many sub-prime borrowers who are at risk of default. The end result will impact consumer spending and confidence.
The rise in bond yields to a five-year high suggests higher interest rates in the future, which would cut into corporate profits as well as the disposal income for consumers. This would translate into lower consumer spending and GDP growth, and could send the economy into a harder landing than investors want to see. Interest- sensitive sectors, like financial and utilities, reacted negatively to the rising bond yields.
In the recent sessions and in the near-term, all eyes will be focused on the economy and interest rates. The Fed meets in two weeks to discuss the economy. No changes are expected, although investors want to hear what the Fed says about interest rates going forward.
Investors will also await the second-quarter results, which are estimated to remain soft. In addition, we continue to have geopolitical risk in the Middle East and terrorism threats.
All in all, it will be an interesting second half of this year. Our advice is to remain prudent and not take any unnecessary risk.