Dow Friday: Will a Housing Slowdown Make Stocks Slump in 2014?

Another set of weak housing data suggests trouble ahead for a key part of the economy. Will it hold back the stock market this year?

Feb 21, 2014 at 11:01AM

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.

The Dow Jones Industrials (DJINDICES:^DJI) appear poised to end what has been a quiet holiday-shortened week on a similarly sedate note. As of 11 a.m. EST, the average was up about 38 points, putting the Dow very close to the same level where it started the week. That might well come as a surprise to many investors, given the ongoing bombardment of downbeat economic data we've seen from the housing market this week. Yet not only have Dow component and home-improvement specialist Home Depot (NYSE:HD) and peer Lowe's (NYSE:LOW) not taken any appreciable damage from the data, but even the homebuilder stocks in the SPDR S&P Homebuilders ETF (NYSEMKT:XHB) have fared reasonably well. Investors are questioning whether that means the stock market is immune to a housing slowdown.

Today's data on existing-home sales raised many of the same concerns that the plunge in new-home starts did earlier in the week. The National Association of Realtors said January home sales fell more than 5%, reaching their worst level in a year and a half. As we've seen repeatedly in recent weeks, analysts put most of the blame for the drop on the cold weather that has plagued much of the nation. But even with that fact well-known, the consensus among economists was that sales would drop slightly less than 4%. Moreover, falling sales in the West, where weather was less of a factor, suggest that a more general slowdown might be here.

Yet one reason the stock market isn't panicking at the prospect of weakness in the housing sector is that after such a big recovery from the financial crisis, periods of sluggish growth are part of the normal economic cycle. So much of the trouble from the crisis came about because the housing market didn't go through these periodic slumps, instead moving upward at a breakneck pace that proved unsustainable. In other words, by accepting that the housing market will occasionally look less robust, investors are focusing more on long-term prospects. That has investors less concerned about things like rising mortgage rates and their short-term impact on the market.

When you look well into the future, fundamentals in housing appear more favorable. The financial crisis led to a near-standstill in homebuilding activity, and many cite the potential for a coming shortage of homes that could take years to fulfill. That's good news for homebuilding stocks, which will have the opportunity to build the homes that more people will want over time.

At the same time, Home Depot and Lowe's discovered during the housing bust that there are other ways they can promote their respective businesses. As long as the general economy keeps moving up, the two retail giants can profit from people staying in their homes as long as they can get those folks to take on improvement projects and renovations.

For now, at least, it doesn't appear that a dip in housing activity will spread beyond the sector and cause the entire stock market to lose steam in 2014. If the move proves to be more than just a cyclical downturn, that might change, but there's little reason to expect further worsening when winter ends.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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