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This Threat Is Holding the Dow Back

By Dan Caplinger - Apr 22, 2013 at 11:03AM

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Don't jump to the obvious conclusions for today's drop.

The stock market started this week off the same way it did last week -- with a pullback stemming largely from earnings-related announcements. As of 10:50 a.m. EDT, the Dow Jones Industrials (^DJI 0.03%) has fallen by 59 points, or 0.4%, while other major benchmarks are also moderately lower. Yet behind the scenes, another piece of discouraging news could have an even bigger impact on the Dow -- not just today, but in the long term as well.

On one hand, the obvious negative news for the Dow came from Caterpillar (CAT -4.32%), which announced lower profit, reduced capital expenditures, and guidance for future earnings that came in at the lower end of its previous range. In particular, mining-equipment sales were a sore spot for the company, as falling prices for commodities have left miners in a much more precarious financial position that won't support as many large equipment purchases. Yet with all the news from China and elsewhere in recent months pointing toward a slowdown in industrial activity, Caterpillar's news wasn't surprising, even though the stock dropped nearly 1% after initially posting gains near the open.

What did come as a shock for many was the decline in existing-home sales in March. Home Depot (HD -0.20%) fell 0.3% on the news, given its sensitivity to the health of the housing market in particular. The major threat, though, is that many investors have pointed to the strength of housing as justifying much of the market's recent rally. Home Depot in particular sports a high earnings multiple of nearly 25. If housing's rebound proves once again to be short-lived, as similar recoveries have in past years, then the disappointment could spread not only among housing-related companies, but across the entire stock market.

Elsewhere in the Dow, Microsoft (MSFT -0.23%) has soared 4% after an activist investor reportedly accumulated a $2 billion position in the company's stock. With the software giant having long struggled to navigate changing tech trends, investors have grown increasingly impatient with Microsoft's progress. Yet even as shareholders applauded the move, having to deal with an activist may prove a further distraction for Microsoft, and unless it results in solid strategic ideas that produce results, the entire episode may simply prove to be another in a long line of disappointments.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$31,261.90 (0.03%) $8.77
Caterpillar Inc. Stock Quote
Caterpillar Inc.
CAT
$197.82 (-4.32%) $-8.94
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$252.56 (-0.23%) $0.58
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$287.19 (-0.20%) $0.57

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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