Housing's Not the Only Risk

Stocks aren't too shaken by signs of a cooler dwellings sector.
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The prospect of a slowdown in the housing market doesn't seem to have rattled traders on Wall Street too badly yet.

As news of a bigger-than-expected drop in existing-home sales in December came out Wednesday morning, major stock proxies first dropped slightly. That, combined with mixed results from homebuilders

Centex

(CTX)

and

Ryland

(RYL)

after the close Tuesday, led the Philadelphia housing sector index down 2%.

However, major indices recovered somewhat in recent action, as crude oil prices continued a two-day slide. Oil had been flirting with $70 a barrel amid geopolitical tensions, but an unexpected drop in U.S. inventories helped push crude down $1.56 to $65.50 in recent action.

The

Nasdaq Composite

was off 1.19 points, or 0.05%, to 2264.06. The

Dow Jones Industrial Average

was recently up 19.85 points, or 0.19%, at 10,732.07, but was pressured by

McDonald's

(MCD) - Get Report

, whose plans to cut company-owned restaurants by 20% disappointed investors.

Johnson & Johnson

(JNJ) - Get Report

, which refused to sweeten its bid for

Guidant

(GDT)

, paving the way for

Boston Scientific's

(BSX) - Get Report

$27 billion offer, was also dragging down the index.

Elsewhere, the

S&P 500

was down 0.19 points, or 0.01%, at 1266.67, weighed down by energy shares. The sector fell along with crude oil, even as

ConocoPhillips

(COP) - Get Report

and

Amerada Hess

(AHC) - Get Report

posted strong earnings.

After last week's series of disappointing earnings and lackluster guidance from high-profile tech companies, investors may have gotten their first taste of what will likely be a year of slowing economic and earnings growth.

Among the key factors that will slow the economy is a cooler housing market. Eventually, that may chip away at consumption, the most important driver of U.S. economic growth.

But as seen with

Alcoa's

(AA) - Get Report

and

DuPont's

(DD) - Get Report

earnings two weeks ago, rising energy cost pressures are more likely to hit corporate profits in the near term than a slowing housing market.

In less than a week, the

Federal Reserve

will meet to deliver another widely expected quarter-point increase in interest rates, but Wall Street has been hoping that the Fed might stop there.

A weaker housing sector and a slower economy would boost the chances of such a scenario, even if bets for another hike in March have risen lately as several Fed officials sounded hawkish tones. Market odds that the Fed will lift its key rate to 4.75% in March stood at 66% on Wednesday compared with about 48% two weeks ago, according to Miller Tabak.

For the most part, the housing pullback's effect on consumption and growth remains a longer-term story, even if the exact timing and scale remains undetermined. As noted by Joel Naroff, president of Naroff Economic Advisors, after the latest home sales data, "we're on the way down the mountain but we don't know how long or how fast will be the decline."

A team of currency strategists with Merrill Lynch in London has been using models based on the dropoff in housing in the U.K., Australia and New Zealand -- and its eventual impact on consumption -- to help predict what might happen in the U.S.

"Historical experience suggests that U.S. housing transactions volume could decline sharply in

the first half of 2006, house price inflation could decelerate by mid-2006, retail sales growth should slow most noticeably

in the third or fourth quarter, and the labor market could be affected by the first half of 2007," they concluded.

That still leaves plenty of time for the short-term oriented to busy themselves with other concerns, real or imagined.