How a 31% Stock Gain Is Actually a “Cooling” Trend – Daily Breeze

October came just after two economic headlines highlighted what appeared to be conflicting trends.

“Home prices have risen by a record amount.”

“The worst month for stocks since the start of the pandemic. “

Now, before you sell your stocks and buy investment property, let me suggest that context is needed to decipher the constant stream of business news alerts.

This apparent split in the fortunes of owners and shareholders is based on changes in two widely watched criteria – the Case-Shiller Housing Price Indexes and the Standard & Poor 500 Wall Street Stock Index.

Is Wall Street hinting that the pandemic-era’s weirdly robust appetite for stocks may be souring? What can this mean for housing?

Bad month

Let’s start with the headline encouraging house prices.

Case-Shiller indices are issued on the last Tuesday of the month. But remember – and a lot of people do – what is being reported is an analysis of home purchase data from two months earlier.

So the headline from late September summarizing housing conditions was for July: US home prices rose 19.7% year-on-year, the largest increase for the benchmark dating back to from 1975.

Then think of that ominous stock market headline. The S&P is released in real time every business day, and bad month numbers were released minutes after the September trading ended. The index was down 4.8% from August, the biggest drop since a 12% crash in March 2020 as COVID-19 froze the economy for the first time.

This calls the old ‘apples-for-apples’ target: For July, the S&P 500 was up 2.3% from June – the sixth month of what turned out to be a seven-month rally that s. ‘is completed in September.

OK, so the timing was out of place. But that’s not all.

Longer lens

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

Meanwhile, many home price statistics, such as the Case-Shiller indices, are frequently discussed in terms of year-over-year performance. I’m not sure exactly why, but such a long reflection helps smooth out the seasonal fluctuations in buying a home.

What if we used such a longer term lens on stocks? My spreadsheet tells me that in July – when the Case-Shiller Index set this record of appreciation – the S&P 500 was 34% higher than 12 months earlier. Yes, a much larger gain than house prices!

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

It is often forgotten that the monthly Case-Shiller indices reflect 90 days of trading activity. This record high ratio reflected prices in May, June and July.

So the spreadsheet adjusted the S&P 500 once again. When the stock market index is (1) for July (2) as a three-month moving average and (3) with a year-over-year lens, the S&P rose 37% in the 12 months – that is, almost double the housing recovery.

The same calculations that often make house price movements a bit calmer can temper the perceived volatility of stocks. Looking at the fluctuations each month, over the past 10 years, stock prices have risen 71% percent of the time. Looking at the same timeframe – but year-over-year results for a three-month moving average – the S&P 500 has a 92% win percentage.

This does not guarantee the continuation of the rise. Please note that my well-adjusted S&P 500 indicator was gaining at an annual rate of 31% in September. It marked the fifth consecutive month of decelerating 12-month appreciation in addition to becoming infamous for that monthly loss that made headlines.

You know, I swallowed when I first saw this scary news at the end of September. But I’m even more nervous with what my spreadsheet told me: stocks are indeed cooling down – so much so any gain of 31% can signal a cooling!

Will house prices be next?

Jonathan Lansner is an economics columnist for the Southern California News Group. He can be contacted at [email protected]

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