I had a couple of quotes in the New York Post last week about what might represent the biggest threat to the stock market this month. I view Syria as a side show and I do not believe "valuations" are too high or represent a threat of their own volition. I also think the debt ceiling and budget deadlines, while they may offer up volatility-generating headlines, are probably more likely to provide the impetus for relief rallies than they are to derail the economic recovery.
These are all legitimate concerns, of course, but they pale in comparison to what I believe is the number one threat right now: Interest rates.
And by interest rates, I do not mean the absolute level, but the velocity of the increase, taking place at a speed the markets are currently unprepared for and businesses may not have planned for. The effect of higher rates on the housing market is already being felt in the New Home Sales number. We've seen a 20% drop-off in new home sales in June and July, and this does not bode well for existing home sales in the coming months or in Case-Shiller home prices next quarter.
The reason this is so important is that the housing recovery is the key underpinning of the economic recovery and the biggest tailwind for stocks and risk appetites in general. The wealth effect from stabilizing to rising home prices and the optics of a buoyant real estate sales environment have absolutely contributed to the rising PE multiples in equity markets. Should mortgage rates - which are already up 100 basis points since the spring - continue to rise, I believe that a lot of the essential confidence we've enjoyed could evaporate - and stock gains along with it.
40% of the growth in the second quarter's GDP number was directly related to housing, according to Scott Minerd at Guggenheim. If he's right, then supporting the housing market should be the Fed's number one goal right now, not chasing phantom asset bubbles.
So of the litany of current market fears - Syria, Egypt, China's banking system, the Taper, the debt ceiling, the budget battle, the twerking epidemic, high oil prices, etc, the one I am most worried about is the effect of higher rates on the housing market.
Click over for my quotes in this morning's paper as well as some insight from my pal Cullen Roche (Pragmatic Capitalism):