This is another fascinating look at the complexities of our economy and investing.
The question: If real estate tanks, will stocks follow? Or will the market ignore housing? Or maybe — just maybe — will a decline in housing trigger a rise in stocks? It's something you really ought to think about if you're trying to figure out where to put your money.
As if we needed more questions...
OK, so here's some of the thought processes.
Conventional wisdom, and some historical evidence, suggests that a decline in housing is associated with a fall in stocks. Evidence of a slump continues to mount: On Sept. 18, the National Association of Home Builders said its monthly sentiment index fell to a 15-year low. And on Sept. 19, the Commerce Dept. said that housing construction fell 6 percent in August to its lowest level in three years — an annual rate of 1.67 million starts.
So, who else has an opinion?
Let's start with the main, bearish case. Making the rounds of investment advisers is a chart prepared by Merrill Lynch showing the Standard & Poor's 500 stock index overlaid on an index of homebuilding activity from the National Assn. of Home Builders. The chart shows that the S&P 500 goes up one year after the homebuilding index goes up, and goes down one year after the homebuilding index goes down. (The correlation is 0.8, which means it's pretty strong.)
The scary part: The homebuilding index has plunged over the past year. If you believe that history repeats itself, the S&P 500 is about ready for a nosedive.
Charts, graphs and statistics. Who wrote this, Ross Perot?
Another chart — this one from InvesTech Research — correlates changes in private residential construction with recessions. Going back to 1968, it shows that with just one exception, every time there has been a downturn in residential construction, a recession has occurred at the same time or shortly after. (The exception: 1995.) That indicator, too, is flashing red, because residential construction has shrunk over the past year.
Geez. There's more.
...consumer spending has been buoyed by the housing boom. People spent more freely because they felt wealthier and because they turned their homes into piggy banks through home equity loans, cash-out refinancing, and other means. Take away jobs and consumer spending, and it's no wonder that many experts expect a housing slump to hurt stocks.
So, if your home equity loan is bigger than your stock portfolio you might be nervous about a downturn.
And then there are the risk-takers (joke).
Others say it's too soon to declare the stock market dead because of housing. "Summing it up, I'm in the camp that says I don't know and the jury is still out," says Jeffrey Saut, equity strategist for Raymond James Financial.
That was brave.
As you know if you've followed this blog for any length of time, I'm fascinated by what the "experts" have to say, and just how contradictory it is at times. I still hold to the belief that a lot of this really is just about how people view things. If the news is bad, then the general economic 'mood' is down. If it's good, the opposite is true.
I just can't help but feel that there are those who understand this and profit off it.
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