Stock market rebounds -- Thanks to real estate cash

October 4, 2006

On Tuesday, the Dow Jones Industrial Average closed at
11,727.34, beating its all-time high of 11,722.98 reached in January 2000. Many experts believe investors are moving cash into the stock market, and out of a weak housing market.

• The National Association of Realtors reported that existing home sales in August were 12.6% lower than last year’s sales. Furthermore, the median sales price was $225,000, down 1.7% from last year.
• This is the first time housing prices have declined since 1995, when it declined only .1%, and the largest decline since 1990, when it declined 2.1% and the nation was in a recession.
• The inventory of unsold homes was at 7.5 months supply, the highest since April 1993. To reduce this inventory, home sellers will need to reduce prices even more.

What It Means:

Stock investors are optimistic and believe the Fed has stopped raising interest rates because inflation is under control.

• Oil has dropped to within $60 per barrel, down from a high of $78 in May.
• Businesses are not passing profits onto workers’ salaries, keeping one of the most serious drivers of inflation in check.

On the other hand, if the housing market declines too far, it could tip the economy into a recession. (See this week's related article on the inverted yield curve.)

Action Steps:
This is when a well-diversified portfolio really pays off. Check your asset allocation, and make sure you are still within your goals. If you don’t know what your asset allocation goals should be, talk to your financial planner, or check out our Special Report “Retirement Planning 101”.

Source: National Association of Realtors web site