The Chicken and the Egg recovery

by Wayne Ferbert on July 29th, 2013

Today, we see some of the first cracks in the housing picture. Contracts for existing home sales declined in June. May had come in at a 6-year high on such sales. And the June number was still up more than 10% over June 2012. But May was also revised downward. The Housing market is weakening.

Back on July 8th, we wrote about the likely economic recovery that would not get much lift from the housing sector. We continue to believe that our economy can recover even if the housing industry does not provide much of the lift. We warned in that article that the move up in interest rates would likely hurt home sales and home prices.
 
We all know the increase in interest rates spurred the drop in housing sales. A recovering economy has to see an increase in interest rates. The market moved rates up – and home sales complied with weaker data.

It is a bit of a chicken and egg problem. Is the economic recovery weak because of housing? Or is housing weaker because of the broader economic doldrums?

In the past, housing was the straw that stirred the economic drink. But this economic stagnation is different from any we have seen in the past - and at a different time in our country's evolution. Housing is important - but it doesn't stir the drink alone. 
 
What does all of this mean for the market? Consumers are often driven to optimistic purchases and spending when they ‘feel’ wealthier. For many consumers, the single most valuable asset they own is their home. So, when the price of the home increases, the consumer feels better about spending.
 
In this case, the opposite is true. The spending will likely decline as home prices stagnate or drop. The most sensitive stocks to such a decline are clearly Consumer discretionary stocks. But a weak consumer hurts many other industries also from materials, to technology, to industrials. On some level, many of these other sectors are driven by some level of consumer demand.
 
What is our outlook based on this data? We continue to expect the market to have a +6% to -6% potential swing in the next 3-6 months. We think it will be range bound. We would not be surprised by a material correction in the next 12 months. Our 3-5 year outlook is very bullish.
 
So – be long for the long haul – but be hedged. 


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