The past two weeks have seen positive “surprises” in GDP, initial unemployment claims, housing starts, pending home sales and I have detailed the refusal of rail traffic to do its normal year end collapse. Yet markets are selling off due to the “fiscal cliff” hysteria. It is just that, hysteria. Just like last year the EU was going to destroy the world, the fiscal cliff is more hype than reality. That is fine though as it gives rational people mis-priced equities to buy that will lead to superior gains in 2013. Just like the end of 2012 gave us a $5 Bank of America Corp (NYSE:BAC) and American International Group, Inc. (NYSE:AIG) warrants at $7 (both up ~100% since). The current reaction is giving us some more opportunities.
Patient investors with an eye past tomorrow in a perverse way should welcome the cliff and the opportunities is may give us. Whatever happens it will pass and eventually get solved. But the wonderful prices we may get to buy stocks at and hold will be with us for a very long time after the fiscal cliff is long forgotten.
To that end, housing will continue to drive the economy in 2013. The supply of new homes is just far too low and is leading to increased construction and will continue to do so for the next few years. This in turn will lead to more construction jobs and we will see the benefits of that. Note: housing’s turn has not lead to the expected jobs increase because builders have been finishing off previously mothballed projects. New land is being bought and new projects started. We have already seen some of this effect on construction jobs and it will accelerate into 2013.
The Monthly Supply of New Homes for Sale (New Home Inventory) remains low at 4.7mos and continues to be a positive for equities-see chart. The historical Neutral Supply/Demand Trend Line for this economic measure is ~6.2mos. Above the historical trend represents too much supply and results in declining Residential Construction Employment while below the trend has proven positive for increases in this employment category. The New Home Sales market turned positive ~14mos ago but has yet to register much improvement in related employment. We should witness improvement in this employment category in future months as has been the historical pattern. Like all economic data, predicting with precision is so often stymied by the statistical collection methods and ad hoc government action, but even so the current trends favor higher equity prices the next several years.
Optimism remains warranted.