Since President Obama’s re-election the prevailing market sentiment on Wall Street has seemingly shifted from one of uncertainty to undeniable euphoria. With fiscal cliff drama off the table and improving manufacturing data from China, investors saw little reason to stick with safe haven assets in the new year. Equity markets have been rallying strong in 2013, with major indexes like the S&P 500 posting five-year highs, as generally upbeat corporate earnings have kept confidence levels elevated. While bullish price action continues to reign supreme, the number of experts calling for a market top seems to be growing by the day [see Visual History Of The S&P 500].
Among the most common critiques of the ongoing stock market rally is that there are no fundamentals supporting it. It’s true that the Fed’s QE programs have been the driving force since the recent financial crisis came to a simmer; however, that is specifically what the stimulus initiatives were intended to do, inject both confidence and liquidity into the markets as the global recovery was still taking root. With the Fed hinting at possibly pulling the plug on its bond-repurchase program sometime in 2013, it’s quite clear that policymakers have a stimulus exit strategy in mind as the strength of the economic recovery becomes more pronounced [see 101 ETF Lessons Every Financial Advisor Should Learn].
It’s hard to argue against the notion that equities are due for a pullback given their stellar run-up thus far on the year; however, it’s also stubborn of some investors to deny that key economic indicators are in fact quite bullish. As such, below we take a look at three charts that showcase that the U.S. economy is alive and kicking, along with ETFs that may benefit as the recovery gathers steam:
1. New Housing Permits
Housing permits are considered a great leading economic indicator as the real estate industry is both interest-rate sensitive and highly dependent on the health of the labor market [see 2013 ETFdb Portfolio].
Consider the chart above and notice how the lower-limit for this indicator has historically been around 800,000 units. Granted the most recent recession broke this trend, but it’s still worth recognizing the sheer upside potential in the housing industry as showcased by the historically low level of new permits being issued. The housing market is showing signs of a turnaround and with new permits clearly on the rise again, homebuilders should continue to thrive in 2013:
- SPDR S&P Homebuilders ETF (XHB, A+)
- Dow Jones US Home Construction Index Fund (ITB, A)
- Dynamic Building & Construction Portfolio (PKB, A)
2. Motor Vehicle Sales
Auto sales are a huge part of consumer spending in the United States, and as such, this economic indicator offers valuable insights into domestic consumer-spending trends as a whole [see also How To Swing Trade ETFs].
Consider the chart above and notice how auto sales have rebounded, quite strongly at that, off their historical lows of around 25-30 million units. This trend has been going strong for the past few years, which demonstrates that consumers are in fact making big purchases, and continuing to do so, despite what some pessimistic headlines have to say. The rebound in the domestic auto industry should continue into 2013 judging by the upside potential seen in the chart above:
- NASDAQ Global Auto Index Fund (CARZ, C+)
3. Initial Weekly Jobless Claims
Initial jobless claims are the number of people who have filed to receive unemployment benefits for the first time, and this number is often used as a leading economic indicator [see also 101 High Yielding ETFs For Every Dividend Investor].
Initial unemployment claims have been steadily falling for the last few years while so-called experts continue to criticize every employment report; the most notable instance of this criticism occurred when the unemployment report right before the 2012 presidential election was heavily scrutinized, when in reality the labor market had been showing signs of steady improvement. The improvement in the labor market is undeniable, however, this by no means suggests that stocks can continue rising without a hiccup.
The Bottom Line
The economic indicators highlighted above showcase that the recovery has in fact taken root, implying that another recession in the near-term is highly unlikely. While it’s true that equity markets may be nearing the top of a bigger cycle and could soon be headed for a steep correction, the fact of the matter is that economic data has been improving, and thus there really is “fundamental fuel” behind the rally.
Disclosure: No positions at time of writing.