S&P500 dropping to 600 by spring 07

[powayseller]

Read Roubini’s blog, where he makes an excellent case for the recession. Read my comments and analysis on the same topic going back to last spring. Then, form your own opinion.

[an]

No one is saying that there’s an excellent case for a recession. We’re just saying that’s it’s impossible to make any prediction about anything in life to a 100% certainty. It’s very similar to the perma-bull saying RE price can’t fall until it start falling, then they revise it to soft landing, then temporary drop and will go back to positive soon. In 2004, they were 100% certain that this time is different and all the data shows that they’re right. Does that make them right?

[BradPitt]

Here is some more data with another chart showing year by year comparisons.

http://skepticalspeculator.blogspot.com/2006/08/us-housing-market-weakens-will-stock.html

[(former)FormerSanDiegan]

The top plot sure looks familiar. Evidently they plotted the same data that I used.

Interesting part of the article is that for different periods the lag between housing and stocks changes, and the amount of correlation changes. In the 80’s & early 90’s there was some correlation with NO lag. In the late 90’s the lag required to get high correlation was 12 months or more.

The analysis that shows correlation by changing the lag may be data mining. If you take two signals that are out of phase and actually anti-correlated (one rises when the other falls) and lag them by a long enough factor you can show a positive correlation.

When someone changes the lag to demonstrate that two things are correlated, that makes me instantly cautious about how I interpret the results, especially for quantitative predictions.

When the underlying conditions change, statisticians call the process “non-stationary”, to a layman this means that the way these variables (HMI & S&P) relate to eachother changes over time. This makes it difficult or impossible to use this analysis to do any prediciton.

The author in the link even points this out by stating

“The question of whether there is a lag is an important one, of course, because if there is a lag, then the stock market is likely to fall over the next few months based on the recent decline in the HMI. On the other hand, if the lag seen in recent times turns out to be a temporary phenomenon and the S&P 500 reverts to a more coincident relationship with the HMI, then the recent decline in the latter could already have been discounted and provides no indication of the likely direction of the stock market.”

In other words the author says a stock market decline will either follow or it won’t, depending on where you think the lag should be going forward.

[powayseller]

When you plot % change yoy, you see this trend holds true back to 1986 after all. “This chart shows that the stock market did not completely ignore the housing market in the earlier period. Whenever the HMI fell, the rate of change of the S&P 500 did tend to fall, even when the index itself did not fall.”

[BradPitt]

I don’t know if this has been discussed. But if people take investments out of real estate, won’t they decide mutual funds are better and raise stocks up somewhat? Or will the underlying problems still show through eventually?

[Chrispy]

Good question. I think it’s a bit circular – some mutual funds have large financial holdings, which mean you’re putting money back into shares of Fanny Mae, WaMu, Bank of America, etc. That sector may lag along with housing which could cause some mutual funds to underperform overall (or just not gain much) despite shares in other sectors going strong.

I think discretionary and retail spending is also going to take a hit eventually – also a large component of some funds.

[BradPitt]

http://www.investorsinsight.com/thoughts_va_print.aspx?EditionID=294

That might help support and explain the SP500/Housing correlation.

But on the other hand, I am considering what the other guy said about the HMI in phase and then out of phase with the stocks. One year out of phase is a suspiciously long time. I think I would want to find some logical explanations for why that happens such as the above article and what Chrispy just said.

On the other side of the arguement, why didn’t 1992 – 1996 get affected much at all if this is so very true? Plus when things fell in 2002 for the SP500, it was because of the dotcom bubble and not really because of housing right? You could argue that was what started the dotcom bubble too. Therefore, that entire hump was probably just coincidence. Then when people saw low stock prices, naturally they just pick up and start rising again…about when houses started rising too.

We had another national real estate fall from 98 to 02? I didnt know that.

[bgates]

Unless I misunderstood you, we’re not looking at people taking money out of housing. We’re looking at wealth vanishing.

If a guy bought a house in 2000, and somebody buys an identical property for 300k more in 2004, the first guy, and everyone in his position, has (or feels like they have, and usually spends like they have) $300k more than they used to. But if in 2007 another identical house sells for just $50k more than the 2000 price, $250,000 of the first guy’s paper wealth would be gone – not removed, not reinvested, not even stolen. It just wouldn’t exist anymore.

‘Taking money out of housing’ makes it sound like when you squeeze one part of a balloon and another part gets bigger. But when the housing balloon gets squeezed too much….

[(former)FormerSanDiegan]

Roman – This is the thread related to the plot you posted.

[(former)FormerSanDiegan]

Prediction Update :
S&P near 1340 today.

[(former)FormerSanDiegan]

Update :

S&P at 1374, only 774 points to go for S&P down to 600 by spring 07

[woodrow]

Ouch – COP down > 5% since PS’s purchase in late Aug.

Stock market is on fire since she went 95% cash in March ’06.

Perhaps shorting PS’s market advice is the way to go?

[poorgradstudent]

“Stock market is on fire since she went 95% cash in March ’06.”
This isn’t a totally fair statement. The S&P 500 rose a tiny bit until early May, then dipped from there into mid-June. Had powayseller bought back in sometime around July or August, I’d say that was good market timing.

Most of the good economic analysis I’ve seen predicts a 40% or so chance of recession in ’07. But how far will it go up before it goes down? And how far will it actually fall? How much worse would imperfect market timing be compared to Buy and Hold? From my reading of Roubini, the average decrease in the market from peak to trough is 10-20%. The S&P is up 10.2% on the year. 3rd quarter profits have been solid, economic indicators are mixed. A lot of the big boys are predicting somewhere in the low 2% for GDP growth in ’07. Energy prices are down. The earliest I could see a recession would be late ’07.

I’m 100% certain there will be a recession in the future. I’m also 100% certain I’m not 100% certain when it will be. To me, the lowest risk strategy is to buy and hold solid companies.

[powayseller]

My recession call is early. However, I am earning over 5% in my CD, and when the market does tank, it won’t take me down with it. I purposely exited the market early, expecting it to start dropping this fall. It looks now like I was 1 – 2 quarters early. However, I am in good position earning risk-free over 5%. Soon, these markets will tank, and when markets tank, they don’t give any warning.

Is there any doubt the market will tank? The last 10 housing busts on record have led to recessions, except the two busts occurring during the Korean and Vietnam Wars (wars are good for the economy). Now, the Iran war is just causing more debt, so it is not stimulative as the other wars were. I’ve always admitted I’m not a market timer, but a long term investor. If you want to do some good short term trading, check in with Chris Johnston. He’s very good at that.

[Author]

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