PD –
I remember the other thread along the same lines as you. It is correct that stocks have fallen in recessions which was the general premise there. It is also probably a good bet that the S&P 500 will drop significantly in the next recession. I’ll grant those points.
But I think it absolutely clear what is stated in this thread.
It was stated that the S&P500 will drop to 600 by Spring 2007. (That’s a drop from 1301 at that point to 600 … a 53% drop) The reasoning was based on the HMI index being correlated with a certain lag with the Stock market.
I personally don’t care if we re-interpret it as a 53% drop by Spring, Summer or Fall 2007. My opinion is that that re-interpretation will turn out to be incorrect as well.
If we re-interpret that the stocks will drop by Spring 2007, to the same levels as it was when this was originally posted it might be correct.
My problem is directly linking the magnitude of a drop in item A, simply because it is correlated with item B and item B drops by 53%. This is naive, she succumbed to someone’s cherry picked 10-year segment of a time series and made a naive conclusion.
If you look back at page one of this thread, where I plotted a longer range time series you can see that there are large movements in HMI that result in very little movement in S&P 500. In fact 1989-1990 saw a 64% decline in the HMI, while the S&P 500 declined by about a 15%. That was heading into the July 1990 – March 1991 recession.
That’s right a 64% decline in the HMI led to a 15% decline in S&P 500, not a 64% decline.
I am re-posting the plot to which I refer below for convenience.
[img_assist|nid=1399|title=S&P and HMI|desc=Plot of S&P 500 and NAHB/WF HMI index.|link=node|align=left|width=466|height=314]
