Hi Guys,
One persistent investment story is that homebuilding activity is a leading signal for equity market returns. Is that postulate myth or reality?
National macroeconomic data over decades shows that homebuilding construction directly contributes between 2 % and 6 % to the GDP metric. It is currently near the historic lower floor value. Home services add a more impressive 15 % to 20 % to that total. That’s a significant enough weight to influence our overall prosperity. But does the composite homebuilding measure lead or lag the stock market?
The short answer is neither. It is a concurrent statistical indicator.
Today, the CXO Advisory Group reported a brief study that examined the timeline between homebuilding activity and the S&P 500 Index. Here is the Link to that study:
http://www.cxoadvisory.com/3578/economic-indicators/do-homebuilders-lead-the-market/Please visit the referenced website. CXO does reliable statistical work.
CXO demonstrates that the equity market and homebuilding are tightly coupled; CXO shows, that on a monthly basis, housing functions can explain about 33 % of equity market returns. That finding is not exactly shocking since the housing industry and its supplemental mechanisms are such a major factor in our GDP.
CXO explored the timing issue by shifting the two data sets over a plus 12 months to a minus 12 months. Noise was generated; no discernable pattern was evident.
CXO concluded as follows: “In summary, evidence from a simple analysis of historical monthly returns does not support a belief that homebuilder stocks reliably lead or lag the overall stock market.”
I guess another candidate market forecasting tool must now be assigned to the dustbin of history. Real data, examined carefully, is a demanding taskmaster, a destroyer of dreams, but a pathway to real understanding.
Let’s continue the march down another route.
Best Regards.
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