Cliff Resolution Already Priced In

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Optimism on the ‘Fiscal Cliff’ front should provide a positive backdrop for today’s trading action. But a snap rally after a deal does get announced appears unlikely as the market was all along pricing a last-minute resolution.

Both sides in the negotiations appear to be coming down from their initial maximalist positions, making a deal very much within reach over the next few days. The market’s position reaction Monday reflected this reality and the trend will likely continue today as well.

We could see it at play in the bond market as well, with treasury bond yields steadily inching up. This makes sense as demand for the safe-haven treasuries should drop in a less-uncertain environment.

But we shouldn’t expect a significant carry-through from this trend, as the market was all along behaving as if the deal was a certainty. After a short period of weakness after the election, stocks have been making steady gains, ignoring the rhetoric from both sides.

Deal optimism aside, we have the December NAHB Housing Market Index, also known as the homebuilder sentiment index, coming out a little later. The expectation is for the measure to tick up a bit after the strong increase in November that took it to its highest level since May 2006.

The improving housing outlook has been a solitary bright spot on the economic horizon. As would be expected, this has made homebuilders like Pulte (PHM), Lennar (LEN) and Toll Brothers (TOL) star stock market performers this year.

We will hear more about this favorable trend this week in the November Housing Starts data Wednesday morning and the Thursday fourth quarter earnings release from KB Homes (KBH). Given the strong gains in homebuilder stocks thus far, investors are justified to worry if the recovery story has already been fully priced in.

We shouldkeep in mind, however, that while earnings growth for the rest of the corporate world has run its course, it is just getting underway for homebuilders and other housing related companies. Total earnings for the Construction sector are expected to be up 28.7% in the fourth quarter, the highest of any of the 16 sectors.

This follows earnings growth of 55.8% and 42.3% in the third and second quarters, respectively. What this means is that homebuilder stocks should be able to sustain their momentum as long as they are able to sustain the earnings growth momentum.

Source: Zacks

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