The stock market proved again last week that it’s vulnerable to bad news relating to U.S. subprime mortgage lenders. This week should give investors a clearer view of the housing market’s health, and whether it’s stable enough to stave off an overflow of that sector’s troubles into the wider economy.
In addition to housing data, investors will be digesting the Federal Reserve’s take on inflation and trying to figure out if the central bank is leaning toward a rate hike — a move that could put even more of a drag on the housing market and consumer spending.
Last Tuesday, the Dow Jones industrials dropped more than 240 points when the New York Stock Exchange said it was moving to de-list New Century Financial Corp., Accredited Home Lenders Holding Co. said it was low on cash, and the home loan units of GMAC Financial Services and H&R Block indicated they’re struggling. The subprime mortgage industry isn’t a huge portion of the U.S. economy, but some market sages (including former Fed Chairman Alan Greenspan) are saying troubles could escalate and spill into other sectors if home prices drop off significantly, making mortgages impossible to refinance.
On Friday, the markets will find out if homes lost value in February, when the National Association of Realtors reports last month’s median home price. January’s report — which came out Feb. 27, when the Dow Jones industrials plummeted more than 400 points — showed that the median home price fell for the sixth straight month. The data will also include existing home sales and inventories; economists are expecting February sales to slip to 6.35 million, after jumping to 6.46 million in January.
Investors this week should also get a better idea of how the sluggish housing market is affecting the industries that depend on it. On Monday, the National Association of Home Builders will release its index on builders’ perceptions of new single-family home sales and near-term sales prospects. And Tuesday, the Commerce Department reports on February housing starts and building permits; the market is expecting housing starts to have risen to 1.450 million from 1.408 million in January, and building permits to have slipped to 1.56 million from 1.57 million.
Also Tuesday, Fed policy makers begin their two-day meeting to discuss whether to adjust short-term interest rates. Market watchers are forecasting that the central bank will leave rates unchanged for the sixth straight time, but the statement it releases Wednesday could provide some insight into whether it sees rising inflation as a bigger threat than the flagging economy.
Disappointing news related to the housing market or lenders, as well as a harsh warning from the Fed or signs of weakness in overseas markets, could convince Wall Street that the market’s downturn isn’t over yet.
The Dow finished down 0.41 percent last week; the Standard & Poor’s 500 index declined 0.38 percent; and the Nasdaq Composite Index fell 0.25 percent.
On Monday, the Chicago Fed is expected to report that its manufacturing index rose 0.3 percent in February.
On Thursday, the Conference Board will release its index of leading indicators, a widely followed economic forecast gauge, for February. The market expects a decline of 0.5 percent, compared to an increase of 0.1 percent the previous month.
Friday will bring speeches from Philadelphia Fed President Charles Plosser and New York Fed President Timothy Geithner.
On Tuesday, investors will be watching for Oracle Corp.’s fiscal third-quarter earnings, which are expected to come in at 23 cents per share. The database and software maker closed last Friday at $16.70, in the middle of its 52-week range of $13.07 to $19.75.
Also Tuesday, the next big financial company to report first-quarter financial results will be Morgan Stanley, which closed at $74.41 last Friday, in the middle of its 52-week range of $54.52 to $84.66. It’s expected to post earnings of $1.88 a share.
On Thursday, KB Home will report its first-quarter earnings, which are forecast to come in at 27 cents a share. The homebuilder closed Friday at $45.38, in the lower end of its 52-week range of $37.89 to $69.10.
On Friday, one of the biggest U.S. mortgage lenders, Freddie Mac, is expected to post fiscal fourth-quarter earnings of $1.33 a share. It closed at $59.52 last Friday, at the lower end of its 52-week range of $55.64 to $71.92.