The second quarter may have begun with a bang, but it could very well end with a whimper.
Stocks ruled the roost in April, with impressive returns from nearly every market cap and valuation band. The revival in the credit markets are certainly one reason for the buoyancy in stocks, as was the obviously oversold conditions that most indices found themselves in at the beginning of the month. But in order to really build on this momentum, there needs to be some signs of life in the housing market.
The so-called "wealth effect," which posits that consumers are more likely to buy stuff when their assets rise in value, explains a big chunk of the rise in consumer spending. Typically, with every $1 rise in assets, consumers spend around a nickel. But consumers tend to view increases in housing prices as more permanent increases in wealth than, say, gains in stock prices. This means that as the housing market continues to deteriorate, it will probably have a more lasting and significant impact on consumer spending than changes in stock and bond prices.
Eventually, there will be recognition of this relationship. I'm not saying stock prices won't rise from here, but to see the types of gains experienced in April, the moribund housing sector will have to see some much-needed relief.
