2. From an economic perspective, Japan is the short-term problem, but construction/financial services is the long-term problem. Sustainable employment gains will be difficult to hang on to as long as 25% of our economy is suffering alongside housing.
We expect that President Obama will soon announce an economic plan that he can take with him on the 2012 campaign trail. We expect this plan to attempt stimulate the housing market. If such a plan does get introduced it should have a positive effect on the stock market.
Again, we need to look at leadership stock action as a forward-looking indicator. The
SPDR S&P Homebuilders
is down 12.5% since late April, while the
Select Sector Financial SPDR
is down 10.9% and the S&P 500 has fallen 7.4%.
If the XHB or the XLF rally, we will know that a cyclical bull market is on the verge of erupting. At E Weather, we have always felt that the initial 9-month rally from the March 2009 lows was merely stage one of the market recovery.
Stage two has had a difficult time getting started because of fears surrounding European debt contagion, turmoil in the Middle East and North Africa, and the current economic soft patch caused by Japan. If any semblance of confidence returns to the housing sector it could ignite a significant long-term rally.
3. Although housing remains weak, we must remember that most of the damage is already priced into the market.
Housing only matters when a short-term shock to the system, like Japan, reveals the true fragility of our recovery. These short-term shocks do, however, work both ways.
Last Thursday we learned that the weak dollar is doing its job as U.S. exports are picking up dramatically. The April report showed an 18.8% year-over-year increase in exports, which more than makes up for a weak housing market.
Combine this with the 12% three-month surge in commercial and industrial lending, the 19.2% rise in May tax receipts (despite a cut in payroll taxes), and the 55% rise in individual income tax payments, and it lends credence to the thesis that U.S. equities could find reason for optimism in the midst of a June/July Japanese recovery.