While every week offers a unique set of economic reports and company events that affect the S&P 500 (^GSPC -0.54%), some weeks are bigger than others. And the next five days fall into the latter category. What follows, in turn, are the three most important events that investors should watch out for as the week progresses.
1. Housing starts -- Wednesday
The housing market is a critical litmus test for the economy, not only because it was affected so severely by the last recession, but also because it's at the heart of our economic engine. Every new house that's built creates between two and three new jobs. And home values have a direct impact on consumer confidence, as a house is traditionally the largest asset that most consumers own.
It's for this reason that investors will be watching housing starts closely when the Commerce Department releases the data on Wednesday. In July, the most recent month on record, overall housing starts were up over the previous month by 14.5% and by 12.9% compared with the same month last year. More disturbing, however, was that single-family starts experienced a decline on a sequential basis.
2. Existing-home sales -- Thursday
On the other end of the housing supply-chain are existing-home sales -- a seasonally adjusted measure of previously owned home sales. With respect to the housing market itself, this is arguably the most important metric, as between 5 million and 5.5 million houses are currently changing hands on an annual basis.
When the National Association of Realtors last reported this statistic, the data revealed a sharp increase in home sales. For July, total existing-home sales grew by 6.5% on a seasonally adjusted annual basis over June. And compared with the same month last year, they were 17.2% higher.
3. The Federal Reserve -- Wednesday
Last but not least, on Wednesday, the Federal Reserve is set to announce whether it will reduce its support for the economy. As I noted yesterday, the guidance will almost invariably dictate the direction of stocks for the week.
Most commentators seem convinced that the central bank will indeed start to taper its monthly purchases of Treasuries and agency mortgage-backed securities. Patti Domm of CNBC, for instance, predicted that the purchases will fall by $10 billion to $15 billion, "a relative baby step compared to the massive amount of stimulus applied." If true, the net result is likely to be higher long-term interest rates.
The trend in this direction thus far has wreaked havoc on balance sheets across the financial sector. Two of the hardest-hit companies have been the mortgage REITs Annaly Capital Management (NLY 0.16%) and American Capital Agency (AGNC 0.33%). In the second quarter, Annaly saw its book value per share fall by 18%, while American Capital Agency's has dropped by nearly 20% since the end of last year.
The big question now is what will happen to their quarterly dividend payouts. Both have been forced to aggressively cut their payouts over the last few years. Annaly's is down by nearly $1 since the end of 2010. American Capital's is off by a similar magnitude since the end of 2011. Whether they have to continue doing so will have a direct impact on their underlying share price.