Capital goods put in a strong performance Monday, buoyed primarily by expectations of a stronger housing recovery. Homebuilders and construction equipment suppliers were up strongly after a slight pull-back last week. Accelerating residential construction could be an important driver for the entire capital goods sector, as new building will require new equipment and infrastructure and will generally indicate higher purchasing power. Some important clues as to whether capital goods providers can extend their gains are being delivered this week. Here's what to watch for.
On Monday, ratings agency Fitch raised its outlook for the U.S. housing industry, projecting that single-family housing starts will improve 19% in 2012, up from its 12% forecast last month. That announcement led to solid gains for homebuilders like Standard Pacific (NYSE: SPF), which surged 5.3%, Lennar (LEN -1.01%), up 3.6%, and D.R. Horton (DHI -1.29%), which tacked on 3.5%. Most homebuilders have been rising steadily throughout 2012, but weakness last week indicated that some investors felt the sector had become overpriced. Fitch's projections might have changed that impression, but the homebuilders will only hold on to their gains if the data coming out this week confirms Fitch's optimism.
On Tuesday, the National Association of Homebuilders in conjunction with Wells Fargo (NYSE: WFC) will release its Housing Market Index, a monthly survey of homebuilders that rates market conditions for the sale of new homes as well as the traffic of prospective buyers. This index has been gaining in recent months. A score of 42 out of 100 is expected, compared with a score of 40 for September.
September housing starts will be announced on Wednesday, with a consensus estimate of 768,000 starts expected, versus 750,000 starts prior. Finally, existing-home sales for September will be announced on Friday, with consensus estimates pegging that figure at 4.7 million. If homebuilders are to avoid a prolonged retrenchment and extend their considerable gains, all or most of these figures should meet or beat expectations.
A strengthening American housing sector should also support companies that produce building materials and equipment, such as gypsum and building products maker USG (USG), which was up 3.6% on Monday. USG has rallied more than 100% since the beginning of the year, as more construction has spurred demand for its products. USG will release third-quarter earnings on Thursday, giving investors some more insight into the building-supply industry.
New housing also gives a boost to companies that supply products that new homeowners need. General Electric (GE -2.11%), one of the world's largest producers of home goods such as refrigerators, ovens, fans, and light bulbs, will release its own third-quarter earnings on Friday. As one of the largest industrial conglomerates, GE's results will be a bellwether not only for home goods, but also for a range of manufacturers of capital goods as diverse as mining machinery, power generation equipment, infrastructure development products, and aircraft engines.
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