On Tuesday morning, the Dow Jones Industrials (DJINDICES:^DJI) initially spiked higher as earnings season continued to go reasonably well. Yet once again, the Dow has moved with some intraday volatility, with the average up 81 points as of 11 a.m. EDT. Even though there's been plenty of bullish news for the stock market lately, one troubling trend could pose problems for Home Depot (NYSE:HD) and Caterpillar (NYSE:CAT), both of which are underperforming the Dow this morning after the latest reading on the S&P/Case-Shiller index of home prices.
The state of housing
It might seem odd for investors to be nervous about housing. The Case-Shiller 20-city index rose 0.8% in February, which was better than economists had expected. That brought the total increase year over year to 12.9%, a solid recovery by any standards.
Moreover, yesterday's latest data from the National Association of Realtors seemed positive on its face. Pending home sales for March were up 3.4%, with solid gains in three of the nation's four regions. Only the Midwest saw a slight decline in sales from February to March, with persistent winter weather continuing to weigh especially hard on the region.
But a couple of longer-term trends have discouraged many investors. Pending home sales were down year over year by 7.9%, reflecting in part poor weather but also less affordable home prices. In addition, the NAR projected that median existing-home sales prices would rise between 6% and 7% this year, but it also expects sales of existing homes to fall by almost 4%.
That weakness has some housing experts worried as well. For instance, Yale economist Robert Shiller told CNBC this morning that he sees other signs that the housing market is weakening, even though pricing data remained stronger than he expected. S&P Dow Jones Indices index committee Chairman David Blitzer also pointed to weak housing starts and other housing statistics as contradicting price gains.
Home Depot's slight decline this morning reflects those concerns about the housing market. With Home Depot entering its key spring season, it needs enthusiastic homeowners willing to spend money on their homes in order to drive the home-improvement retailer's sales and profits. Home Depot has done a solid job of finding ways to grow even when the housing market was weak, but it has many more ways to grow when the economy is recovering strongly. If conditions deteriorate, then competition in the space could prove especially problematic for Home Depot, especially if promotional pricing practices that have crushed retailers in other niches hit the home-improvement area.
Meanwhile, Caterpillar is affected much more by new-home construction than by existing-home sales, but the trends in the two markets largely track each other. Caterpillar has faced huge problems in the mining industry, with plunging commodity prices hurting its customers' ability to buy heavy equipment. As a result, Caterpillar is relying on a potential recovery in construction and infrastructure activity to help its sales decline bottom out and for revenue to start growing again. The last thing Caterpillar needs is for a weak housing market to crush that part of its recovery as well.
Housing plays a vital role in the economy, but it's especially important for Home Depot and Caterpillar. Watch to see how the Dow responds if housing doesn't recover its former momentum soon.
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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