Fed Distracts Investors From the Power in Housing

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

As investors wait to see what the Federal Open Market Committee's meeting minutes from July will tell them about the timing of anticipated stimulus "tapering," the Dow Jones Industrial Average (DJINDICES: ^DJI  ) is wallowing in the red, down 81 points as of 11:55 a.m. EDT. While Mr. Market looks anxiously toward the 2 p.m. EDT release of the meeting minutes, he's losing focus on news that will actually impact the overall economy.

Fed watch
Frankly, the amount of effort devoted to finding hints regarding the Federal Reserve's next move is getting out of hand. This is doubly true when you consider today's edition of Fed watch: The FOMC minutes will likely follow the steady message that Chairman Ben Bernanke has been spouting all along and provide little detail about when the tapering will actually begin. If you stick with the knowledge, as provided by Bernanke, that tapering will begin later in the year but remains tied to overall improvement in the economy, then you can ignore the mini-meltdowns that occur on days like today.

Look elsewhere
For those of you looking for actual news, rather than a rehash of already-determined meeting outcomes, the housing market has some good news for you. This morning's release of weekly mortgage-application activity showed some progress, though you have to look closely. Overall, the composite index fell 4.6% last week, weighed down by an 8% decline in refinancing-application activity. This was likely due to the 12-basis-point increase in interest rates that occurred last week. But despite the rise in rates, applications for new-purchase money loans rose 1% during the same time period. This is a big improvement from the 5% drop seen the week before.

This morning also saw the release of July's existing-home sales data, which recorded a 6.5% increase from June, marking a three-year high. The rise once again proves that the recent spate of increasing interest rates has only had a small effect on the housing market and buyers' actions.

Housing power
It's a known fact that the housing market is one of the key drivers of economic growth, but it's sometimes hard for investors to see the connection. A great example has played out in the past week or so involving retailers' earnings. Consumer spending is one of the biggest components of the nation's gross domestic product, so retailers play a huge role in the economy, and their earnings can be used as barometers for growth. In their latest earnings reports, retailers have been open about slower consumer traffic in stores and lower sales -- indicating that consumers are feeling cautious and holding on to their money. Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) , the two largest retailers in the nation, have both warned that full-year results will be lower than previously estimated. Sales for both companies fell short of expectations during the past quarter, implying that consumers aren't feeling secure enough to spend their money.

Housing-focused retailers are telling a different story, however. Home Depot (NYSE: HD  ) and Lowe's (NYSE: LOW  ) both reported higher-than-expected earnings in their second-quarter reports this week, with the increase in housing market activity boosting sales. Given higher resales of existing homes, the home improvement stores are likely to see more customers enter their doors, looking to make their homes more to their liking. The improvements in the housing market have spurred more people to spend money on their homes, while the overall economy is giving other consumers pause.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only the most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the "3 Companies Ready to Rule Retail" in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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