Monday, September 29, 2008

An oldie but "goodie"

From January 2008:

In this posting from late 2006, I commented on an article in Fortune magazine entitled "Can the economy survive the housing bust?" Quoting the beginning of the November 2006 article:

Tucked away in the briefcase of Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., is a chart so scary she's hesitant to show it to investors. It plots the National Association of Home Builders' Housing Market index - a monthly measure of builder confidence - against the Standard & Poor's 500 stock market index, with a one-year lag.

It turns out that the mood of builders is a terrific stock market bellwether: The correlation between current builder confidence and future stock market returns over the past ten years is downright unnerving.

Not only did the NAHB index presage the start of the post-1994 bull market in stocks, but its decline starting in 1999 foreshadowed the equity market collapse that came the following year. Builder confidence rebounded in November 2001 - a year ahead of the stock market upswing that began in October 2002.

Why is Sonders worried now? Just look at the chart [Keith: see below]. Over the past year, the NAHB housing index plummeted 54 percent. Were stocks to follow suit, the S&P - 1400 in late October - would be trading below 700 this time next year.

Here's the graph:

So how are builders feeling today? According to a report from the AP last week, not well at all.

A reading of U.S. homebuilders' sentiment remained near a record low in January, as gloom engulfed the housing industry.

The National Association of Home Builders said Wednesday its housing market index, which gauges builders' perceptions of current conditions, interest from potential buyers and expectations for home sales over the next six months, came in at 19 in January — the second-lowest point on record.

The group also revised December's reading downward by one point to a new record low of 18, the lowest result since the index began in 1985.

Here's a graph of the NAHB Housing Market Index for January 2007 to January 2008:

The S&P 500 Index on January 18, 2008 was 1325.19, down 7.09% from January 18, 2007's 1426.37. Assuming Ms. Sonder's theory is correct, then the S&P 500 index should fall 48.57% by December 2008.

To be fair, there were a few boneheaded statements made in that Fortune article, at least from today's perspective.

"The effects of the housing correction will be entirely contained within the housing sector," says Mike Englund, chief economist of Action Economics.

Updates:

  • NAHB confidence for September 2008 is 18, up from 16.
  • The S&P has fallen 14.33% [at this moment] since this entry was first posted in January 2008 and is down 20.77% since January 2007.

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