Did Goldman Scare Investors Away from Homebuilders?

In March, Goldman Sachs (NYSE:GS) issued a report to clients calling stocks an once-in-a-lifetime opportunity. “The prospects for future returns in equities relative to bonds are as good as they have been in a generation,” wrote Peter Oppenheimer, the firm’s chief global equities strategist. Since then, both the Dow Jones Industrial Average and S&P 500 have declined significantly, causing investors to be more cautious than ever of Goldman’s most recent recommendation on homebuilders.

Following the company’s first quarter housing survey, Goldman recommended that clients buy high-end homebuilders Toll Brothers (NYSE:TOL) and PulteGroup, Inc. (NYSE:PHM). The survey showed that 63 percent of consumers expect home prices to be stable or positive, compared to 58 percent six months earlier. Furthermore, 83 percent of respondents with an income of $120,000 or more expect home prices to be stable or positive, compared to 75 percent six months earlier.

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Homebuilders have outperformed the general market year-to-date, but Goldman’s upgrade came on the steepest one-day decline in stocks this year. The Dow Jones Industrial Average and S&P 500 are suffering their longest losing streak since last year. Instead of receiving a boost on the upgrade, shares of Toll Brothers and PulteGroup fell 4.7 percent and 6.5 percent, respectively. Lennar Corp. (NYSE:LEN), the top performer in homebuilders for the year, dropped more than 7 percent. Instead of rushing to buy homebuilder stocks, investors appear to be taking Goldman’s latest call as a reason to book profits. After strong gains in the first quarter and growing uncertainties in the macro picture, who can blame them?

Aside from Goldman’s past recommendations, investors are struggling to place confidence in housing stocks this week as unemployment remains high. The latest unemployment report showed that only 120,000 jobs were added in March, well below estimates north of 200,000. BMO Capital Markets explained, “It is tough to argue that an increase in U.S. employment is negative but the details make this report disappointing. Also, it doesn’t help that there were such high expectations ahead of the release. And, the U.S. economy has still lost 5.3 million jobs since the economy peaked back in December 2007. So there’s a long way to go before we’re ‘normal.’ But progress is slowly being made,” according to Reuters.

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