Last week all the major market indices eked out positive gains, even despite the late-week reversal, which came as "fiscal cliff" discussions took a turn for the worse. As the market closed out the trading week, Congress and President Obama left Washington for the Christmas holiday. With five trading days left until the end of the year, the growing consensus is that the U.S. economy may indeed go over the fiscal cliff at least for a brief period.
All the attention on fiscal-cliff conversations has likely left a number of investors in the lurch concerning key economic data this past week. The two noteworthy standouts were the favorable housing data and the continued relative strength in durable orders. Several pieces of housing data were bullish, among them the December reading from the National Association of Home Builders Housing Market Index, as well as November housing starts, building permits and existing-home sales. When combined with continued tight inventory for single-family homes, these metrics bode well for the housing market and housing stocks.
Stripping out defense and transportation, durable orders for core capital goods grew 2.7% following October's 3.2% improvement. Early reads on December manufacturing, in the form of the Empire Manufacturing Index, suggests December may reflect some slowing. Investors can confirm this with the December Chicago purchasing managers index, due out Friday.
The last five trading days of the year often serve as a time to sharpen your pencil for the coming 12 months. Trading volume is bound to be low, given diminished staffing levels at trading firms and mutual funds, hedge funds and other institutional investor groups -- so we could see some wide market swings. However, this is also a time to be both vigilant and forward-looking. In particular, the quieter sessions are great for sitting back and assessing the plethora of forecasts in front of us. Whether it's from companies, trade associations, economists or others, the slower days are great for comparing and contrasting these numbers in order to see what looks probable, and what simply doesn't add up.
Recently the National Association of Business Economics (NABE) presented its outlook for 2013, a consensus of 48 macroeconomic forecasts. These call for the real U.S. gross domestic product to grow 2.1% on average next year, compared with a 2012 rate that's shaping up to be around 2.2%. Sifting through the details of that forecast, we see the consensus view is for the economy to improve throughout 2013, with GDP growth estimated to reach 3% in the fourth quarter. If we break that down with some simple math, we see the first half of 2013 is poised to be far weaker than the second.
Turning to the stock market, for S&P 500 companies Wall Street expects 2013 operating growth of 6.5% to $108.06 per share, according to Thomson Reuters. That forecast suggests the S&P 500 is trading at roughly 13.2x earnings, more than twice the expected growth rate. Keep in mind that earnings here are tracking to grow only 3.6% this year vs. 2011. Before too long, companies will start to report their fourth-quarter results, and most accompany these reports with guidance for the coming 12 months. At that point, we'll have a better sense as to how realistic that 6.5% earnings growth forecast is.
Given that it's a holiday week, there will be a minimum of economic reports and even fewer rounds of corporate earnings. With only a handful of days until companies close their books for both the fourth quarter and for the year, I'll be sure to keep an ear to the ground for companies that try to sneak through negative earnings news during the quiet trading week. But, even so, more than 600 companies will be paying dividends this week ahead of the potentially higher dividend tax rates that commence in January.
Here's a more granular look at the economic data and corporate earnings that are on tap for this week:
Monday, Dec. 24 -- Christmas Eve -- U.S. stock markets close at 1 p.m. EST
Tuesday, Dec. 25 -- Christmas Day -- U.S. stock markets closed
Wednesday, Dec. 26 -- Mortgage Bankers Association (MBA) Mortgage Index (Weekly)
Wednesday, Dec. 26 -- Case-Shiller 20-City Index (October)
Thursday, Dec. 27 -- Weekly Initial and Continuing Jobless Claims (Weekly)
Thursday, Dec. 27 – New-Home Sales (November)
Thursday, Dec. 27 -- Consumer Confidence (December)
Friday, Dec. 28 -- Chicago Purchasing Managers Index (December)
Friday, Dec. 28 -- Pending Home Sales (November)
As most years tend to be, 2012 was a busy one with a number of things weighing on the stock market. As we enter one of the most joyful times of the year, on behalf of my family I'd like to wish you and your loved ones a merry Christmas and happy holidays.