MarketView for November 26

Summary

The Nasdaq composite index closed above 4,000 on Tuesday for the first time since 2000, while the Dow and S&P ended almost unchanged. Helping the Nasdaq were Apple, up 1.8 percent to $533.40, Google up 1.2 percent at $1,058.41 and Amazon.com up 1.3 percent at $381.37.

Retailers and homebuilders were among the best performing sectors, responding to stronger-than-expected earnings and robust housing market data. Meanwhile, the S&P 500 index is up nearly 27 percent this year, due in no small part to expectations that the Federal Reserve's stimulus will continue at least until the end of the year.

Disney led the Dow in percentage gains, with shares rising 2.1 percent to $71.18. The company announced better-than-expected earnings earlier in the month. Tiffany ended the day up 7 percent to $88.02 and was the S&P 500's top performer after the retailer's third-quarter sales exceeded expectations.

Wal-Mart rose 0.3 percent to close at an all-time high of $80.86 a day after the retailer named a new chief executive. Jos. A. Bank Clothiers closed up 11.2 percent to $56.29 after Men's Wearhouse said it would buy the company for $55 per share in cash, a 9 percent premium to its close on Monday. Men's Wearhouse ended the day up 7.5 percent, closing at $50.60.

Stronger-than-expected figures on building permits for October and a steady rise in housing prices also helped out. Permits for future U.S. home construction hit a 5-1/2 year high and an index of single-family home prices notched big gains in September. As a result, Ryland Group ended the day up 5.6 percent to close at $40.02 per share.

Trading is expected to remain light this week, with financial markets closed Thursday for the Thanksgiving holiday. Markets will also close early at 1 p.m. (1800 GMT) on Friday.

Housing Picks Up Speed

Building permits were near a 5-1/2 year-high in October and prices for single-family homes moved sharply higher during September, suggesting a run-up in mortgage interest rates has not derailed the housing recovery. The data releases on Tuesday were the latest signs of strength in the economy, despite headwinds from rising mortgage rates and last month's partial government shutdown.

Building permits jumped 6.2 percent last month to an annual rate of 1.03 million units, the highest since June 2008, the Commerce Department said. It was only the second time since mid-2008 that permits breached the 1 million-unit mark.

Last month's increase exceeded Street expectations for a 930,000-unit rate. Permits, which lead housing starts by at least a month, rose 5.2 percent in September and were up 13.9 percent from a year ago in October.

A separate report showed the S&P/Case Shiller composite index of home prices in 20 metropolitan areas rose by 13.3 percent in September, when compared to a year ago, the strongest gain since February 2006.

Home prices have largely been driven by a supply squeeze as a glut of foreclosed properties clears. However, the combination of rising prices and rising mortgage rates can only result in some potential buyers being pushed out of the market. This will dampen demand and is expected to gradually slow the pace of house price increases in coming months.

A Reuters’ survey published on Tuesday forecast home prices rising 6.5 percent next year, roughly half the pace expected in 2013.

Interest rates have risen sharply since May as markets anticipated the Federal Reserve would start cutting back on its monthly bond purchases this year, with the 30-year fixed mortgage rate surging nearly a full percentage point. It hit 4.49 percent in September, the highest since July 2011, according to mortgage lender Freddie Mac. But rates have been retreating as expectations of a Fed taper are pushed to early next year, averaging 4.19 percent last month.

Nonetheless, the strong rise in house prices, rising stock market prices and improvements in job gains are not helping to lift household spirits, which could be a challenge for retailers during the holiday shopping season. In a third report, the Conference Board said its index of consumer attitudes fell to 70.4 this month from 72.4 in October. Consumers' labor market assessment was little changed.

But while building permits are not counted in gross domestic product, they are a key indicator of economic activity and the sturdy gains in both September and October should ease concerns the housing market recovery was stalling.

Yes, higher mortgage rates have slowed the pace of home sales. However, at the same time demand for accommodation as household formation continues to recover from multi-decade lows is expected to keep supporting residential construction.

Permits for the multifamily home sector surged 15.3 percent in October and approvals for buildings with five units or more reached their highest level since June 2008. Single-family home permits, the largest segment of the market, rose 0.8 percent.

The Commerce Department postponed the release of figures on housing starts and completions for September and October until December 18 because the collection of data was affected by the 16-day shutdown of the government last month. November data also will be published at that time. The partial shutdown of the federal government also delayed the publishing of the September and October permits reports.