My wife Carole loves to look at homes for sale, online and in person, even when we’re not in the market to buy. It’s a hobby for her. She also watches a lot of real estate reality television shows. I do not share her enthusiasms in this regard, but my spouse of 32 years is a microcosm of the U.S. economy.

For most Americans, their home is their biggest asset and an integral part of their long-term wealth building strategy.

It’s often said that home is where the heart is. While this familiar axiom traditionally refers to our sentimental attachment to our homes, it’s accurate to say that homes and more specifically, housing data, also are dear to the heart of the stock market.

As the Federal Reserve pivots and interest rates continue their descent, the housing market should rebound in 2024, enhancing the “wealth effect” among consumers and investors. This virtuous cycle in turn fuels economic growth and stock market gains.

On the housing front, we got some good news this week that supports the bull case for the broader equity market. The U.S. Census Bureau reported Tuesday that U.S. homebuilders broke ground on a much higher number of residential projects in November than analysts had expected.

New-home construction surged in November to a six-month high. Residential starts increased 14.8% last month to a 1.56 million annualized rate; the consensus forecast had called for a 1.36 million pace.

Construction of single-family houses jumped 18% to the highest level since April 2022, while starts of multifamily projects increased 6.9%.

The following chart tells the story of a housing market on the mend:

The brisk pace of homebuilding is yet another signal of economic health. There’s been a shortage of homes ever since demand soared during the COVID pandemic, when an increasing number of people bought properties to use as vacation homes and home offices, or to flee congested cities to live in rural and suburban areas.

What’s more, elevated mortgage rates have been a disincentive for prospective buyers. But as the Federal Reserve pivots and bond yields decline, mortgage rates have been falling as well.

Rates on the popular 30-year fixed mortgage are currently hovering around 6.95%, according to Freddie Mac, down from a high of 7.79% at the end of October. That said, the rate is far above the pre-pandemic average of 3.9%.

In a bullish technical sign, the SPDR S&P Homebuilders ETF (XHB) has jumped more than 50% year to date (see chart, with data as of market close December 20):

The XHB has soared well past its 50- and 200-day moving averages, another bullish harbinger for the housing sector, the economy, and the stock market.

That said, the main U.S. stock market indices closed lower Wednesday, as follows:

• DJIA: -1.27%
• S&P 500: -1.47%
• NASDAQ: -1.50%
• Russell 2000: -1.89%

It only stands to reason that investors would pocket some profits, after the stock market’s long winning streak. Stocks were getting overbought and a breather should be considered natural. It’s encouraging, though, that the benchmark 10-year U.S. Treasury yield edged even lower, to land at 3.87%.

Bonds on the rebound…

After falling by more 10% in 2022 and treading water for most of 2023, U.S. investment grade bonds have mounted an impressive comeback over the past two months, triggered by the steep decline in yields.

Through mid-October, the Bloomberg U.S. Aggregate Bond Index, which is a proxy for U.S. investment-grade bonds, had slumped by over 3% since the start on the year, as stronger-than-expected U.S. economic growth and hawkish signals from the Fed suggested that interest rates would need to remain higher for longer, a dynamic that kept yields high.

However, over the past two months, falling inflation and dovish intimations from the Fed suggest that the central bank is nearing the end of its rate hiking cycle, which has weighed on yields.

The 10-year U.S. Treasury yield plummeted from about 5% on October 19 to below 3.9% today. During this time frame, the Bloomberg U.S. Aggregate Bond Index has surged over 8%, and is now up over 4% year-to-date.

WATCH THIS VIDEO: Navigating The Transition from 2023 to 2024

Defensive assets that underperformed in 2023 are setting the stage for a comeback in 2024. Specifically, as you recalibrate your portfolio allocations for next year, turn to utilities stocks.

The utilities sector has gotten clobbered lately by rising interest rates, but it’s poised to gain traction as bond yields continue their descent. That means value plays are ready for the picking.

However, you need to pick the right ones. For our list of the highest-quality utilities stocks, click here now.

John Persinos is the editorial director of Investing Daily.

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