Wall Street shrugs off poor home sales

Stocks have risen again on Wall Street today, keeping the leading index benchmarks on track for their third weekly gain in a row, despite a drop last month in existing home sales.

Sentiment is a curious but powerful component in trading decisions. Back in January we had economic data for December suggesting encouraging growth in the US economy, but the stock market went through a small correction regardless, because investors were rattled by volatility in the emerging markets.

In contrast, US economic data has been largely disappointing this month, yet the stock market is now on course for its third consecutive week of gains. The go-to excuse of bad weather seems to be a cover for the simple truth that investors have rediscovered their risk appetite and simply want to be long share prices right now; bad weather can’t possibly lie at the root of every and any indication of softness in the US economy.

A case in point is today’s home sales report from the National Association of Realtors (NAR). Existing home sales fell to an annualised rate of 4.62 million last month, down from December’s 4.87 million, a month-on-month drop of 5.1%. No doubt, the winter storms have not helped, but neither have high house prices, constrained supply and discouraging mortgage rates. California cannot use the excuse of bad weather, but home sales still dropped 7.3% in the West, as compared to the weather-afflicted Northeast’s decline of 3.1%.

Larry Yen, the chief economist of the NAR, said that disruptive weather patterns have impacted housing, but the headwinds of tight credit, low supply, higher prices and higher mortgages ‘will hinder home sales activity until the positive factors of job growth and new supply from higher housing starts begin to make an impact.’

The impact of higher mortgage rates can be seen in how cash buyers are propping up the market. All-cash sales made up 33% of transactions in January, up from 28% a year ago.

Despite this latest sign of softness in the economy, share prices have risen steadily today. By early afternoon in New York, the Dow Jones was up 0.18% or 28 points at 16,161, a similar pace to the S&P 500, which gained 0.16%.

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