Ahead of Wall Street - Dec 26, 2012

Wednesday, December 26, 2012

The market’s focus in this holiday-shortened week will remain on the unresolved ‘Fiscal Cliff’ situation, but we do have some housing-related data on tap this week, starting with the October Case-Shiller home price index a little later today and New Home sales data on Thursday. Housing has lately been and will likely remain the solitary bright spot for the economy. But with ‘Cliff’ issue dragging on literally to the last minute, we shouldn’t be surprised if the market ignores fresh housing data altogether the remainder of this week.

We already know that home prices have started moving up and today’s Case-Shiller reading for October will provide further confirmation of this trend. The strong gains in the stock prices of homebuilders like PulteGroup (PHM - Analyst Report), Toll Brothers (TOL - Snapshot Report) and Lennar (LEN - Analyst Report) this year tell the story. Improved affordability and leaner inventories are behind the favorable housing momentum and the trend should strengthen further in the New Year, unless Washington forces the economy to fall off the ‘Cliff.’

On its own, the U.S. economy should keep chugging along, though GDP growth in the current quarter and the one after it is expected to be materially lower than the +3.1% pace we had in the third quarter. Housing has become a positive contributor to economic growth, but it likely gets offset by the emerging weakness in the manufacturing sector and the pullback in corporate spending. That said, momentum on the housing side has beneficial knock-on effects throughout the economy, which should provide more stability and staying power to the economic recovery.

The favorable housing narrative aside, the economy’s likely trajectory in 2013 will depend a lot on how the ‘Fiscal Cliff’ issue gets resolved in the coming days. The so-called ‘grand bargain’ is clearly off the table now, but it’s unclear if we can get even a much more modest ‘fix’ in place through the handful of remaining days. But if a resolution is in the cards, it may not come before New Year's.

Sheraz Mian
Director of Research