The market is up, while the real US economy stalls. What wins out in 2019?

After bottoming out on Christmas Eve, the stock market has gained back everything it lost in December in the last 2 months. Maybe it’s related to interest rates leveling off and dropping, or that we aren’t in a government shutdown any more, but it’s hard to figure out exactly why there’s been a 20% snapback. And CNBC was wondering the same thing this week.

Stocks' monster comeback coincided with a wave of downward growth and earnings revisions from Wall Street. In fact, while the S&P 500 comes roaring back, first-quarter earnings growth forecast for the S&P 500 firms has turned negative, a drastic cut from above 3 percent growth seen in late December. Consensus first-quarter GDP growth has also been slashed to below 2 percent.

"Either markets have to come down to where growth expectations are, or growth and earnings expectations have to move higher to justify current market valuations," said Torsten Slok, Deutsche Bank's chief international economist, in a note on Tuesday.

After the worst December since the Great Depression, the S&P 500 enjoyed its best January in more than 30 years and is set to finish February on a strong note. Many have credited the market driver to the growing optimism toward a trade deal with China and the Federal Reserve's more "patient" approach to tightening. However, growth expectations have not kept up with the market rebound and some economic indicators are pointing to more weakness going forward.

There definitely have been signs of a slowing economy for the end of 2018, including news from this week. For example, the housing market has definitely stopped booming.

Standard & Poor’s said Tuesday that its S&P CoreLogic Case-Shiller national home price index posted a 4.7% annual gain in December, down from 5.1% in the previous month. It is the lowest level since September 2015. The 20-City Composite posted a 4.2% annual gain, missing analysts’ estimates of 4.5%. The 20-City Composite is down from 4.6% in November.

“The annual rate of price increases continues to fall,” said David M. Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices, in a press statement. “A decline in interest rates in the fourth quarter was not enough to offset the impact of rising prices on home sales. The monthly number of existing single-family homes sold dropped throughout 2018.”

Existing home sales continued to slide in 2019. During the past 12 months, sales have plunged 8.5%, according to the National Association of Realtors. Sales of existing homes declined to a seasonally adjusted annual rate of 4.94 million in January — the slowest sales rate since November 2015. The dip was attributed to ongoing affordability issues.

“Even at the reduced pace of 4.7% per year, home prices continue to outpace wage gains of 3.5% to 4% and inflation of about 2%,” said Blitzer.
Separately, the U.S. Commerce Department said Tuesday that housing starts fell 11.2% in December from the previous month to its lowest level since September 2016. The dip indicates that developers expect fewer new homes will be sold this year. Housing starts have plummeted 10.2% over the past year.

While others are quoted in the article as thinking this is a good thing, because the slowing increases help with affordability in a time where employment and wages are rising, there’s another issue that might not make that so.

And that’s because younger adults are dealing with an increasing amount of other types of debt, which could be another reason that houses may not be getting bought.

Debt among 19 to 29-year-old Americans exceeded $1 trillion at the end of 2018, according to the New York Federal Reserve Consumer Credit Panel. That’s the highest debt exposure for the youngest adult group since late 2007.

Debt levels play a role in how young adults view their spending conditions, according to a University of Michigan survey Friday. Younger adults -- those under age 35 -- have reduced their spending compared with previous generations possibly because of weakened job prospects, delayed marriage and educational debt….

Student loans make up the majority of the $1,005,000,000,000 owed by this cohort, followed by mortgage debt. New mortgages among young adults today remain quite a bit below levels incurred in the early 2000s. This may suggest adults are waiting longer to buy homes and may opt to rent for a longer period of time than previous generations.

Mortgage debt makes up the vast majority of overall consumer debt but it’s not growing nearly as fast as student loan debt. Since 2009, mortgage debt increased 3.2 percent while student loan debt grew 102 percent.

Huh. Seems like student loan relief might lead to a lot of security and added consumer spending among those younger people, eh?

We’re currently in a backlog of economic data that was a result of the government shutdown in December and January, so we don’t know a lot about how the economy started in 2019. Even the Fed Reserve Chairman admitted today that there were “cross-currents” in the economy, where the stock market indicates the expansion still has room to grow, but the Main Street economy seems to be slowing if not outright heading toward recession.

A lot of that backlogged data comes public in the next 2-3 weeks, and I think it’ll tell a lot of the story of where we head after Q1 2019. Wall Street or Main Street will definitely make a turn in direction, my instinct is that it’s Wall Street heading down, but I’m not going to pretend that I know for sure, because I don’t get what’s going on today.