MarketView for November 20

Summary 

Wall Street ended its two-day rally on Tuesday, after Federal Reserve Chairman Ben Bernanke stated that the central bank lacks tools to cushion the economy from the impact of the "fiscal cliff." Another factor weighing on stocks was Moody's Investors Service's reduction of France's sovereign rating by one notch to Aa1 after the market's close on Monday. Moody's cited an uncertain fiscal outlook as a result of the weakening economy.

Stocks had rallied for the last two sessions after Washington politicians sounded an encouraging note that a deal to avoid the U.S. fiscal cliff could be reached. The gains followed two weeks of sharp losses that pushed the S&P 500 down through the 200-day moving average, a key benchmark of the market's long-term trend. The S&P ended Tuesday near that level, which was 1,382.68.

Bernanke, in comments before the Economic Club of New York, indicated that the Fed does not have the ability to offset the damage that would result if politicians fail to strike a deal to prevent a series of mandatory tax increases and spending cuts scheduled to go into effect early next year. The statement caused a downdraft in the market, though the equity market cut most of its losses before the end of the day.

Add to that an announcement by Hewlett-Packard that it took a $5 billion charge related to "accounting improprieties." HP said it took an $8.8 billion charge in the quarter, with $5 billion related to its acquisition of software firm Autonomy, citing "serious accounting improprieties." HP's market value is now just $23 billion, compared with $100 billion just two years ago.

The company’s shares hit a 10-year low after the computer and printer maker swung to a fourth-quarter loss ending the day down 12 percent to close at $11.71.

Best Buy fell 13 percent to $11.96 after the consumer electronics retailer reported a net loss of $13 million for the third quarter on weaker-than-expected sales at its established stores.

Housing starts rose to their highest rate in more than four years in October, suggesting the housing market recovery was picking up momentum, even though permits for future construction fell.

Volume for the day was roughly 5.6 billion changing hands on the three major equity exchanges, as compared with the year-to-date average daily closing volume of around 6.5 billion shares.

Housing Starts at 4-Year High

Housing starts rose to their highest point in more than four years during October, suggesting the housing market recovery was gaining steam, even though permits for future construction fell. According to a report by the Commerce Department on Tuesday, housing starts increased 3.6 percent to a seasonally adjusted annual rate of 894,000 units -- the highest since July 2008.

The report was the latest to show the broadening housing market recovery was now entrenched. Economists, who had expected groundbreaking to slow to an 840,000-unit rate, said the housing strength laid a foundation for faster economic growth next year.

The housing market has decisively turned around after an unprecedented collapse that landed the economy in its worst recession since the Great Depression. The recovery, marked by rising home sales, prices and building activity is being driven by pent-up demand and record low mortgage rates.

Homebuilding is expected to add to gross domestic product growth this year for the first time since 2005. Though home construction accounts for only about 2.5 percent of GDP, the estimate is that for every new house built at least three new jobs are created.

Last month's data led some economists to raise their fourth-quarter growth estimates. Even so, growth in the last three months of the year is expected to be soft, largely because businesses appear reluctant to invest given the prospect for deep government spending cuts and higher taxes next year. Fourth-quarter growth forecasts currently range between an annual rate of 1 percent and 2.2 percent.

The Commerce Department said super storm Sandy, which slammed the East Coast in late October, had a minimal impact on the data. Economists expected the storm to weigh on homebuilding in November, with rebuilding in the months ahead mitigating the impact.

The upbeat homebuilding report had Pulte, the second-largest domestic homebuilder seeing its share price rise 6 percent. The overall housing sector index was up 2.5 percent in early afternoon trade, outperforming a broadly weak shares market. The Federal Reserve has targeted housing as a channel to boost U.S. growth, announcing in September that it would buy $40 billion in mortgage-backed securities per month until the outlook for employment improved substantially.

It hopes the purchases will drive down borrowing costs. Fed Chairman Ben Bernanke on Tuesday acknowledged the housing market improvement, but said stricter lending practices remained an obstacle to a faster pace of recovery.

"It seems likely that, on net, residential investment will be a source of economic growth and new jobs over the next couple of years," Bernanke said at the Economic Club of New York.

Economists at Goldman Sachs estimate that household formation -- the net increase in the number of households each year -- will increase to a 1.2 million rate in 2013 from 1 million currently. They forecast housing starts rising to a 1 million rate by the end of next year and 1.5 million by the end of 2016.

Groundbreaking for new homes has risen 41.9 percent over the last year, but starts remain about 60 percent below the peak of 2.27 million reached in January 2006.

Last month, groundbreaking for single-family homes, the largest segment of the market, slipped 0.2 percent to a 594,000-unit pace. Starts for multi-family homes surged 11.9 percent to a 300,000-unit rate, reflecting increased demand for rental apartments. Building permits fell 2.7 percent to an 866,000-unit pace in October after rising 11.1 percent the prior month. The drop last month was concentrated in the multifamily segment and is likely to be short-lived. Permits to build single-family homes rose 2.2 percent last month to a 562,000-unit pace, while permits for multi-family homes fell 10.6 percent to a 304,000-unit rate.