I'm Big on Housing Entering Quarter No. 2

Well, the first quarter of 2017 for the markets and the Trump administration is officially in the books. It has been a rocky start for the new POTUS. The media have been all too happy to supply plenty of negative headlines to begin the year as the administration has had some avoidable stumbles, made some poor choices and saw its first major legislative effort get shot down in Congress. However, not all is as negative the president's current approval ratings. Executive actions have started to roll back some of the regulatory excesses of the past decade. This change and the promise of tax reform have been enough to boost business confidence significantly since the election. We have seen two monthly jobs reports easily exceed the consensus, with nice rebounds in small business, construction and manufacturing hiring. Hopefully we get a third this Friday. The Federal Reserve raised rates in March and has two, possibly three more quarter-point rate hikes planned in 2017. The market mostly yawned in response -- a big contrast to the taper tantrums we saw in years past when rate hikes were mentioned. February pending home sales and housing start easily cleared the consensus estimates and mortgage rates have dropped for two weeks in a row. The continued recovery in housing is vital to boosting job and wage growth as each new housing start means three new jobs in the economy. With consumer confidence in February hitting its highest level since December 2000, hopefully housing will start to be a bigger driver of economic activity and job growth. If we could get back to the long-run average of approximately 1.5 million housing starts annually, it would mean an approximate gain of one million jobs. Housing is the second-biggest allocation in my own portfolio at the moment, behind biotech. I continue to like and own names such as Toll Brothers , LGI Homes and Taylor Morrison even if they all have had nice, if lumpy, rallies over the past year. The major indices all hit all-time highs in the first quarter. The S&P 500 rose 5.5% in the opening stanza of the year while the Nasdaq was up almost 10%. The Russell 2000 was largely flat and the small-caps have been absent from the recent rally after a big surge immediately after the unexpected election results; it's an area of concern. Biotech, after a 10% rise in February, largely consolidated its gains in March. The main biotech indices remain right under stubborn upward resistance levels that have been firmly in place since the end of 2015. Merger-and-acquisition activity across the biotech sector has dried up in recent weeks after a nice start to the year in January. I think we need to see deal activity pick up significantly to finally break through to the next leg in the sector's rally. I could see several small and mid-cap names such as Flexion Therapeutics and Acadia Pharmaceuticals make logical acquisition targets here. If animal spirits in the M&A space heat up, larger names such as Biomarin Pharmaceuticals or Incyte could be swallowed up. I see the market neither undervalued or overvalued here. I fully expect politics will continue to be dysfunctional in the second quarter and would not be surprised if the coming Supreme Court nomination vote goes nuclear. More important to the market will be whether tax and regulatory efforts can gain some traction in Congress and whether the economy can continue to performed at a steady pace as the Federal Reserve targets future rate hikes. If nothing else, the second quarter should be anything but boring.

I'm Big on Housing Entering Quarter No. 2

Home builders make up the second-largest allocation in my portfolio, behind biotech.

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