After five years of doom and gloom, good news on the U.S. economy is becoming more commonplace. The good news isn’t stellar, but the direction is right; on Wednesday the Federal Reserve said that higher consumer spending and steady home sales were allowing the U.S. economy to grow at a steady pace, with only Hurricane Sandy causing an uneven dip in an otherwise strengthening American economy.
One point of particular weakness that showed up today was a decline in new home sales; according to the Commerce Department, the rate of new home sales fell by 0.3% in October to an annualized rate of 368,000–slightly below the expected annual rate of 390,000 as projected by economists surveyed by Bloomberg. The rate was 369,000 in September after an adjustment.
How did the market respond? Unfazed. The S&P 500 (SPY) rose 0.79% and the Dow Jones rose 0.83%, with equities broadly up in the United States. The reason for this, despite the disappointing numbers, is quite clear to me, but before we get to that, let’s discuss the mainstream hype and why it really is just noise.
Early in the morning on Wednesday, Bloomberg announced that stocks were falling with the panicked headline “U.S. Stocks Fall on Budget Concern as New-Home Sales Decline”. PulteGroup (PHM) was down over 3% when the news first hit, and the day’s chart for this stock remained discouraging until later that day. Other homebuilders such as KB Homes (KBH), Beazer (BZH), and Ryland Group (RYL) saw similar drops at around the same time.
But the market, inefficient as always, quickly corrected itself and these stocks actually fared rather well for the day. Beazer even rose over 2.76% by the end of the day as investors followed billionaire David Tepper, who bought over 1.3 million shares of the company during the third quarter of 2012. This helped the stock stay in the black for the day, and kept it at a 50% jump from a year ago. Others did not fare so well, but taken as a whole the sector is flat for the day. RYL is up 0.21% and KBH is up 0.62%, while DHI is down 0.82% and PHM is down 0.64%. The homebuilder ETF (XHB) is up 0.19% and is still at post-crisis highs. But what does this mean?
One way to think about this is how volatility implies future price action. A 0.3% drop is usually considered insignificant in periods of strong economic performance, when it will be treated as a blip. During crashes the same drop can be considered a sign of recovery, a sign of a market bouncing on the bottom, or a sign of stagnation. But in late 2012, we are neither in a period of steep decline or of strong performance: now is a macro condition of relative strengthening amidst an economic calamity.
In such a situation, mixed responses to a small decline are a sign of market confidence, especially when compared with volume. These stocks all traded below their average daily volume (except RYL, which was up anyway), in a sign that there is not a rush of money flowing out of these stocks amidst fears of a market crash. In other words, that 0.3% drop is being treated as a blip by the market.
Markets are wrong. A lot. This response isn’t necessarily right, but at least for now it seems that there is a market expectation that new home demand is not going to disappear, and we are not going to return to the tragedies of 2008 and 2009. Instead, the market responded optimistically and ignored the Commerce Department’s figures. While this isn’t exactly proof positive that the American economy is fixed, it is a sign that investors are indeed ready to keep betting on the U.S. housing market, and the U.S. economy as a whole.