The Corner

Bull Run

Spurred by a Fed policy shift to neutral and surprisingly strong housing data, US stock markets rose by 3.5% last week, their best performance in four years. That’s right, four years.

 

The February stock correction based on overly obsessive fears that sub-prime mortgage failures would spread like a virus through capital markets, major financial institutions and the economy has now given way to a renewal of the bull market built on hopes that the sub-prime sickness will be contained and the housing drag on the economy is gradually dissipating.

 

New housing starts surprised the perma-bears last week with a 9% gain reported for February. On Friday, existing home sales scored a 3.9% February blow-out rise that caught the Wall Street smart money completely off-guard. The home resale gain was the biggest monthly rise in three years and the third consecutive monthly gain. The National Realtors Association reports that with small home price declines and rising job-related incomes, their housing affordability index has quietly reached a two year high.

 

Several new studies have been recently published that show delinquent and late-pay mortgages to be only a small fraction of overall home loans. Thirty-five percent of all homeowners don’t even have a mortgage. More than 86% of sub-prime borrowers are not late payers, and over 95% are not in foreclosure.

 

You might not know it from the headlines, but a number of key data points for February were actually quite strong. Besides the two housing releases, the Fed’s index of industrial production increased 1% just for February, and corporate payrolls gained nearly 150,000 including prior month revisions. All this during a month of terrible winter weather that was so bad that over 500,000 people couldn’t get to work, and two Congressional hearings on global warming were cancelled due to unusually frigid and snowy climate change.

 

There are still some sub-prime glitches that will work their way through the economy. But the low-tax, deregulated, resilient and diverse American business system is likely to escape the perma-bear recession forecast. Over the past year the US stock market has gained over 10%, surely a sign of future boom rather than bust. At current interest rates, stocks look to be at least 10% undervalued.

 

Still the greatest story never told.

Larry Kudlow is the author of JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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