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Thursday, December 2, 2021

How stocks rally 31% is actually a ‘chilling’ trend

October came just after a couple of economic headlines illuminated what appeared to be conflicting trends.

“Housing prices have risen by a record amount.”

“Worst month for stocks since the start of the pandemic.”

Now, before selling your stock and buying investment property, let me suggest that context is needed when deciphering the constant stream of business news alerts.

This apparent split in the fortunes of homeowners and shareholders is based on changes in two widely observed criteria – the Case-Schiller Housing Price Index and the Standard & Poor’s 500 Wall Street Index.

Is Wall Street hinting that the surprisingly strong appetite for stocks in a pandemic era could deteriorate? What does this mean for housing?

Bad month

Let’s start with an encouraging headline on house prices.

Case-Shiller indices are published on the last Tuesday of the month. But remember – and many people do – that home purchase data analysis was reported two months earlier.

Thus, the headline in late September summing up housing conditions was for July: US home prices rose 19.7% year-over-year, the largest increase for the 1975 benchmark.

Then think about this disturbing stock market headline. The S&P is published in real time every business day, and the numbers for the bad months are released minutes after the close of trading in September. The index fell 4.8% from August, the largest drop since the 12% collapse in March 2020, when COVID-19 first iced the economy.

This calls for the old apple-to-apples perspective: The S&P 500 is up 2.3% in July compared to June, the sixth month of the seven-month rally that ended in September.

So the timing was not right. But that’s not all.

Longer lens

You know Wall Street watchers have little attention. Looking 12 months into the past or future is an exercise usually reserved for the days surrounding the end of the year, when people think about the year ending soon and what the next might bring.

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Meanwhile, many home price statistics such as the Case-Schiller indices are often discussed in terms of annual rates. I’m not sure why, but this long-term approach helps to smooth out seasonal fluctuations in home purchases.

What if we used such a long-term lens in stocks? My spreadsheet tells me that in July, when the Case-Schiller index set this record high, the S&P 500 was 34% higher than 12 months earlier. Yes, the payoff is much bigger than the house prices!

And as the commercial says, “but wait, there’s more.”

It is often forgotten that the monthly Case-Shiller indices reflect 90 days of selling activity. This record-breaking report reflects prices in May, June and July.

Thus, the table adjusted the S&P 500 again. When the stock index (1) for July (2) as a three-month moving average and (3) with a one-year lens, the S&P rose 37% in 12 months, nearly double the rise in house prices …

The same math that often makes house price movements appear somewhat calmer can soften perceived stock volatility. If you look at the monthly fluctuations, over the past 10 years, stocks have risen in value 71% of the time. Looking at the same period – but looking at annual results for a three-month moving average – the S&P 500 has a 92% win rate.

This does not guarantee continued growth. Note that my well-adjusted S&P 500 benchmark was up 31% year on year in September. This marked the fifth consecutive month of slowdown in rate growth in 12 months, and also became infamous for its high-profile monthly loss.

You know, I swallowed when I first saw that terrible news at the end of September. But I’m even more nervous about what my spreadsheet told me: stocks are indeed cooling – any 31% gain could signal a cold snap!

Will house prices be next?

Jonathan Lansner is a business commentator for the Southern California News Group. You can reach him at [email protected]

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