THE BLOG
01/31/2012 01:28 pm ET Updated Apr 01, 2012

Home Prices, Consumer Confidence, Chicago Data Shake Market Optimism

Never wake a sleepwalker.

That piece of advice is actually a myth, but the stock market sure wishes it was still asleep today.

U.S. stock prices are dropping, with the Dow Jones Industrial Average recently down 70 points, for its fourth straight day of declines -- the longest losing streak of the year. A string of disappointing economic data out Tuesday threw a big bucket of cold water on a stock market that has been blissfully sleep-walking for most of the month, partly on high hopes for the economy.

Downbeat reads on consumer confidence, home prices and Chicago-region business activity are painful reminders that this recovery is still as disappointing -- to both Wall Street and Main Street -- as ever.

The S&P/Case-Shiller home-price index, which tracks prices in 20 key metropolitan areas in the U.S., tumbled 3.7 percent last November from a year earlier. Economists expected a smaller decline in home prices, of about 3.2 percent, according to a consensus compiled by Briefing.com.

Maybe more troubling is the fact that home-price declines seem to be gathering steam. Ian Lyngen of CRT Capital in Stanford, Conn., estimates that the three-month annualized rate of change in home prices was a scary-fast -11.96 percent, down from -7.08 percent in October and a gain of 1.62 percent in September.

It's worth noting that these data, which are already a little old to begin with, track home prices at closings, which tend to lag agreed prices by several weeks. In other words, by the time these numbers hit the record books, they're already old news to the market. As such, the market largely ignored the numbers when they broke Tuesday morning.

But it could not ignore the Chicago Purchasing Managers Index, a closely watched measure of regional business activity, which fell to 60.2 in January from 62.8 in December. Economists expected the number to rise to 62.8, according to Briefing.com.

Traders typically see the Chicago PMI as an early read of the national factory index generated by the Institute for Supply Management. That number is due Wednesday and is expected to rise to 54.5 from 53.9. For both Chicago PMI and the ISM number, any reading above 50 indicates expansion.

The biggest blow Tuesday morning, though, was a report by a private research firm called the Conference Board that its consumer confidence index fell to 61.1 in January from 64.8 in December. Economists had expected that number to rise to 67.

Most economists will tell you to pay closer attention to what consumers do than to what they say, but it is disturbing to see confidence retreating.

Tuesday's numbers are not apocalyptic numbers by any stretch, but the stock market had meandered steadily higher since late last year in part because of a series of happy economic surprises. An index tracking how well economic data are meeting expectations, the Citigroup Economic Surprise Index, rose to nearly a record high of about 92 in early January.

The Citi Surprise Index is a study in human and market psychology. When it's really low, economists are usually slashing their forecasts to match the downbeat news. When it's really high, economists are typically raising their forecasts to match the rosier data.

The recent peak in good news suggests that markets and economist forecasts had priced in all of the good economic news and more, needing bigger surprises to keep rising. The surprise index has been sliding since early January, recently down to 63.50, and now the market is sliding, too.

This morning's data aren't suggesting some kind of big turn in the the economy. They're not suggesting a recession or anything like that. But the numbers had been at least beating Wall Street's lower expectations lately, and now they're not -- which helps explain why the market is falling. We might have more disappointments to come.