GO
Loading...

Can the Stock Market Have a ‘Home-Less’ Recovery?

Small Home
Photo by: Anthony Easton
Small Home

The stock market rallied amid zero or negative job growth in 1991, 2002 and during the current bull market. A so-called jobless recovery has become part of Wall Street vernacular. However, the stock market never had to keep rallying during a period where the prices of homes, where most of Americans’ wealth lies, keep going down. That could be put to the test next year.

Tuesday’s Case-Shiller housing data is expected to show that home prices have started to decline again on an annual basis. The 20-city composite price index will fall 1 percent for October, the biggest monthly drop since the spring of 2009, according to Bank of America Merrill Lynch.

“The recent drop in home prices is partly a reversal of the tax-credit induced gain, but also a function of the flow of distressed properties on the market,” said Joshua Dennerlein and a team of other Bank of America economists, in a note.

“We look for distressed properties to continue to flood the market over the next two years. If it is a gradual, prolonged process, the downward pressure on home prices will be limited. But, if it proves to be faster, prices could take another leg down.”

Jobless recoveries are often a natural part of the business cycle. Companies hire too much during the boom times and then fire too much during the lean times. The stock market will often begin rally ahead of job gains as lower employment improves profit margins. Eventually, for the recovery to take hold, companies that have cut their costs to the bone then need to spark additional returns by investing in companies, plants and people. This in turn improves consumer confidence and carries the second leg of a bull market.

But if some economists are right and housing takes two, or even four, more years to bottom, will the American investor and consumer still feel the confidence to spend big, invest big and save little when the value of their home continues to fall?

“Shadow inventory remains large,” said Stephen Weiss of Short Hills Capital. “This will not derail this market and this will be a ‘homeless recovery.’ However, this may affect the run in financials since my suspicion is that there are more write-offs to come.”

Next year is expected to be a record one for foreclosures, according to RealtyTrac, and that doesn’t bode well for home prices. Twenty-five percent of all U.S. residential sales in the third quarter were foreclosed homes and those particular homes sold at prices 32 percent below units that were not in the foreclosure process, data from the research firm released earlier this month showed.

“It’s possible that pressure in the housing market broadly could pick up in the first half of 2011 and that that could certainly provide an excuse for anyone looking for a pull back to sell,” said Andrew Barber of Waverly Advisors, citing the overly extreme bullish sentiment right now.

* For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.

______________________________________________________
Got something to say? Send us an e-mail at fastmoney-web@cnbc.com and your comment might be posted on the Rapid Recap! If you'd prefer to make a comment, but not have it published on our Web site, send your message to fastmoney@cnbc.com.

Trader disclosure: On December 27th, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Funds Managed by Dennis Gartman are short the Euro; Funds Managed by Dennis Gartman are short the Yen; Funds Managed by Dennis Gartman are long Steel; Funds Managed by Dennis Gartman are long Gold; Funds Managed by Dennis Gartman are long Crude Oil; Funds Managed by Dennis Gartman are long Nat Gas; Funds Managed by Dennis Gartman are long Silver; Funds Managed by Dennis Gartman are long Copper; Funds Managed by Dennis Gartman are long Orange Juice; Funds Managed by Dennis Gartman are long Soybeans; Funds Managed by Dennis Gartman are long Wheat; Scaramucci and Skybridge Capital are long USD; Scaramucci and Skybridge Capital own (AAPL); Scaramucci and Skybridge Capital own (C); Scaramucci and Skybridge Capital own (CSCO); Scaramucci and Skybridge Capital own (GS); Scaramucci and Skybridge Capital own (HRB); Scaramucci and Skybridge Capital own (MS); Terranova owns (UPL); Terranova owns (C); Terranova owns (PEP); Terranova owns (VRTS); Terranova owns (OXY); Terranova owns (GS); Cortes is short (LVS); Cortes is short (XRT) vs. the S&P; Cortes owns (TSN); Cortes is long USD vs. the Australian Dollar and the Mexican Peso; Cortes is short Gold; Cortes is short Nat Gas; Cortes is short Corn; Jon Najarian owns (AAPL), is short (AAPL) calls; Jon Najarian owns (MSFT), is short (MSFT) calls; Jon Najarian owns (XLF), is short (XLF) calls; Jon Najarian owns (MS), is short (MS) calls; Jon Najarian owns (BAC), is short (BAC) calls; Jon Najarian owns (CME), is short (CME) calls; jon Najarian owns (CBOE), is short (CBOE) calls; Jon Najarian owns (V), is short (V) calls; Jon Najarian owns (NKE), is short (NKE) calls; Jon Najarian owns (ADBE), is short (ADBE) calls; Jon Najarian owns (GDXJ), is short (GDXJ) calls; jon Najarian owns (MCP), is short (MCP) calls; Jon Najarian owns (REE), is short (REE) calls; Jon Najarian owns (XLF), is short (XLF) calls


JOE TERRANOVA
Terranova is Chief Market Strategist of Virtus Investment Partners, LTD
Virtus Investment Partners Owns More Than 1% Of (ABAX)
Virtus Investment Partners Owns More Than 1% Of (ALK)
Virtus Investment Partners Owns More Than 1% Of (AMKR)
Virtus Investment Partners Owns More Than 1% Of (CCG)
Virtus Investment Partners Owns More Than 1% Of (CASS)
Virtus Investment Partners Owns More Than 1% Of (CSVI)
Virtus Investment Partners Owns More Than 1% Of (EPR)
Virtus Investment Partners Owns More Than 1% Of (EXR)
Virtus Investment Partners Owns More Than 1% Of (FCFS)
Virtus Investment Partners Owns More Than 1% Of (IGE)
Virtus Investment Partners Owns More Than 1% Of (KRC)
Virtus Investment Partners Owns More Than 1% Of (LDR)
Virtus Investment Partners Owns More Than 1% Of (LPHI)
Virtus Investment Partners Owns More Than 1% Of (MGRC)
Virtus Investment Partners Owns More Than 1% Of (NRCI)
Virtus Investment Partners Owns More Than 1% Of (DBV)
Virtus Investment Partners Owns More Than 1% Of (XLB)
Virtus Investment Partners Owns More Than 1% Of (XLV)
Virtus Investment Partners Owns More Than 1% Of (XLP)
Virtus Investment Partners Owns More Than 1% Of (XLY)
Virtus Investment Partners Owns More Than 1% Of (XLE)
Virtus Investment Partners Owns More Than 1% Of (XLI)
Virtus Investment Partners Owns More Than 1% Of (XLK)
Virtus Investment Partners Owns More Than 1% Of (XLU)
Virtus Investment Partners Owns More Than 1% Of (SUBK)
Virtus Investment Partners Owns More Than 1% Of (WDFC)
Virtus Investment Partners Owns More Than 1% Of (YDNT)
Virtus Investment Partners Owns More Than 1% Of (CLB)
Virtus Investment Partners Owns More Than 1% Of (DRYS)

TODD GORDON
Gordon is long U.S. Treasuries

DOUG KASS
Seabreeze Partners Management is short S&P

JOHN STEPHENSON
Stephenson has no disclosures

MARYANN KELLER
Keller has no disclosures

MIKE KHOUW
Cantor Fitzgerald & Co. is a market maker in (CHK PRD)

GARTMAN SOT
Funds managed by Dennis Gartman are long Soybeans
Funds managed by Dennis Gartman are long Wheat

ANTHONY SCARAMUCCI SOT
Scaramucci and Skybridge Capital Owned (CSCO) on 11/11/2010
Scaramucci and Skybridge Capital Owned (CSCO) on 12/22/2010

GE is the parent company of CNBC

NBC Universal is the parent company of CNBC