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Tony Dwyer Presents: Mythbuster - Housing vs. S&P 500


Financial Market Myth...Busted


Key Points:

  • There is currently a very popular "bear" chart suggesting the National Association of Home Builders (NAHB) Index leads the S&P 500 by 12 months and indicates a major drop for stock prices.
  • My firm put this popular conclusion to the test.


A true historical study using the NAHB Index as a leading indicator for the S&P 500 shows a limited relationship at best. Despite the recent drop in housing and rally in stock prices, my firm continues to be bullish from a fundamental, technical and historical framework.

5-Year S&P 500 with Stochastics:


One of my favorite family television shows is Discovery Channel's "Mythbusters." The premise of the show is to demonstrate whether something seemingly possible is scientifically provable. The most recent episode looked at whether Benjamin Franklin could actually have been electrocuted by flying a kite in a lightning storm, with a key attached to the string. Once in a while, I like to take the same "mythbusting" approach to financial analysis.

Myth: Housing leads the S&P 500 (SPX) by 12-months, which would suggest a significant and sustainable decline from current levels (See Exhibit 1). Since 1997, the correlation between the National Association of Homebuilders (NAHB) Index and the SPX is 0.79, suggesting a strong relationship.

Reality: If we look only since 1997, there is indeed a strong relationship, but my firm wanted to see how it tested using all data. First, we went to the NAHB site and found that the data goes back to 1985 and immediately wondered why all the data wasn't used in the myth.

In the "all data" study, we found the correlation to still be strong at 0.65 (See Exhibit 2). However, we noticed that prior to 1997 – the period that includes the last two economic midcycle environments – showed very little correlation. In fact, from 1985-1997 there was statistically ZERO correlation (0.12) between a 12 month lead in the NAHB Index and the SPX. In addition, there were periods of a nearly perfect inverse correlation (Exhibit 3).

Financial Market Myth...Busted

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No positions in stocks mentioned.
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