Why There Won’t Be a Turnaround in the Second Half

Calling The Trend Column, by George Leong, B.Comm.

Heading into the second half of the year, the news continues to be discouraging on the housing front. There has been some optimism in recent reports, but not enough to point to a much-needed turnaround in housing. Watch for the key Housing Starts and Building Permits on Friday, which will give us a better indication of the how the housing sector is faring. While I do not expect growth, what you want to see is some evidence that housing may be turning.

The reality is that home foreclosures are at record levels, which has helped to drive home sales. Not exactly what you want to see in a healthy market. The bidding wars from the past are long gone, as it is a buyers’ market. For people who purchased property years ago, the value of their homes is still well up, but for those who may have bought at or near the peak, it has been disastrous. Many homeowners are carrying mortgages that are greater than their home values, which add to the foreclosure risk going forward.

The housing market remains problematic, and it will impact consumer spending and take a toll on economic growth, as evidenced by the contraction in GDP. April was no better, as home prices have continued to slide, with every key metropolitan area in the United States reporting a yearly decline based on the Standard & Poor’s/Case Shiller home price index.

The index, comprised of 20 metropolitan areas, declined another 18.1% in April. Foreclosures continue to be on the rise, as homeowners struggle to make payments, especially those with subprime mortgages.

For the investor, the continued credit and housing issues must
continue to be taken seriously. I expect the economy to continue to struggle and slow, perhaps entering a recession later in the year. The fact is that, when people see their homes decline in value, there is a feeling of insecurity, causing a shift in attitude towards spending on non-essential goods and services. Add in the rising energy and gasoline prices, which also take a bit out of your budget, and there is a climate of trepidation in spending.

Consumer confidence will remain a challenge for investors since consumer spending accounts for two-thirds of gross domestic product. The Conference Board reported that consumer confidence in June came in at a weak 49.3, down from 54.8 in May. The concern is that the weak consumer confidence will cause consumers to hold back on spending, especially on big-ticket items and housing, and this would negatively impact the economy in the second half, when many investors are hoping for a turnaround.

I continue to expect the negative impact of the housing market to dictate consumer sentiment and spending going forward.

For investors, cyclical and small-cap stocks should be carefully
analyzed if you are looking to buy.

Looking ahead, you need to be careful in this market and protect your capital. Market risk remains above average. Be prudent when buying. Watch your positions and stops, as this market continues to be vulnerable to downside moves.