The US housing market faces a 'triple whammy' of threats - and stocks may stage a Santa Claus rally, a top strategist says

• The US housing market has been hit by labor shortages, rising costs, and soaring mortgage rates.
• Brian Jacobsen, an Allspring strategist, described those three trends as a "triple whammy."
• Signs of fading inflation this week could spark a Santa Claus rally for stocks, he said.

The US housing market is under severe pressure, stocks might stage a year-end rally, and the Federal Reserve probably won't raise interest rates much higher, a leading strategist has said.

The NAHB/Wells Fargo Housing Market Index, which measures homebuilders' sentiment on a scale of 0 to 100 with 50 being neutral, fell for a 12th straight month to 31 in December. That was its lowest reading since mid-2012, excluding a blip in the data when the COVID-19 virus struck the US in early 2020.

Brian Jacobsen, a senior investment strategist at Allspring Global Investments, blamed the gloomy data on growing fear of a recession, which he expects to strike by the middle of 2023.

"It's been bad for housing," he told Yahoo Finance on Monday.

The industry has already been hit by worker shortages during the pandemic, surging construction costs, and rising mortgage rates — and that has made homes less affordable and dampened demand, according to Jacobsen.

"Kind of a triple whammy there for housing," he said.

On the other hand, the Allspring strategist suggested US stocks could reverse some of their recent declines before the new year. Allspring said in August that it had $476 billion in assets under management.

Jacobsen noted the November reading of the Fed's preferred inflation gauge — the Personal Consumption Expenditures price index — is slated for release Friday. If the data suggests US inflation is moderating, stocks could jump on hopes that the central bank will end its interest-rate hikes earlier than expected.

"We could be setting ourselves up for at least maybe a little bit of a bounceback to end the year," he said, raising the prospect of a "Santa Claus rally."

Inflation surged to a 40-year high of 9.1% in June, and remained above 7% in November, well ahead of the Fed's annual target of 2%. Its policymakers have responded by raising interest rates from almost zero in March to over 4% today.

Higher interest rates encourage people to save rather than spend, and they raise the cost of borrowing, relieving upward pressure on prices.

Jacobsen argued the Fed won't hike rates much higher, and suggested fixed-income investors could benefit as the central bank eases off the gas.

"The end is near for rate hikes, and that tends to be a pretty bullish indicator for the bond market," he said.

Jacobsen also touted emerging markets, saying they've been oversold this year in anticipation of dismal company earnings, and predicted small-cap stocks will lead the market higher next year.

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