Saturday, July 19, 2008 0 comments ++[ CLICK TO COMMENT ]++

The Housing Crisis: Stock Market May Recover Long Before The Recovery Is Evident

Ever heard the expression that the stock markets are forward looking? Well, here is an illustration of that.

The New York Times has a story on the housing collapse, summarizing various aspects of the economy. Anyone following the markets or reading up the economy would not find much insight in the story, but there are some nice charts illustrating the housing price decline and stock market recovery for various housing crises in the past. One of the key things that stand out in the charts--at least for me--is how the stock market in past crises recover long before the housing downturn stabilizes. The following charts, courtesy of The New York Times, shows the cumulative change in real home prices (top chart) and cumulative change in real stock prices (bottom chart):

The three lines in the chart represent the present day USA, banking crisis average, and top 5 banking crisis average (the top 5 happen to be Spain 1977, Norway 1987, Finland 1991, Sweden 1991, and Japan 1992.) The thing that jumps out at me is how the stock market rebounded half-way through the prior crises. This is a clear example of how the stock market is not coincident with economic indicators (in this case real home prices.)

Having said all that, you will notice that present-day US stocks never corrected except in the last 6 months (faint gray line shows a big dip.) So the situation will clearly unfold differently. Furthermore, like all stock market statistics, the sample size is small and there are too many variables at play for anything to repeat identically. Nevertheless, the lesson from these charts is that the stock market can bounce back up long before the housing price bottoms out. Since the market never really corrected until recently, I think there is room for it to fall more, but it should recover before a recovery is evident. (The superbears will argue that this time it's all different and that we are looking at another Great Depression but I don't share that view presently.)


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