CHART OF THE DAY: The Stock Market Doesn't Care About Homebuilders Anymore

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Stock market investors don’t care about homebuilders anymore.

For years, there was a surprising correlation between the National Association of Home Builders’ builder confidence and one-year lagging returns of the Standard & Poor’s 500 stock market index.

A 2006 Fortune article pointed out that from 1995 through 2005, builder confidence was a near-perfect predictor of future stock market returns.

But, as happens all too often, the Fortune story was a contrary indicator.

The correlation it noted broke down in 2006. The home builders index had begun to dramatically decline in 2005, but a year later the S&P kept climbing.  Eventually, stocks did follow the home builder index downward but the timing and the degree of the declines no longer tracked.  

As our chart of the day shows, the S&P-HMI correlation didn’t fare any better this year. The home builder index continued to decline in 2008, completely failing to predict the rally in the S&P in 2009. It’s as though stocks and housing have just decoupled.

This year, the home builder index briefly ticked upward before falling again.  Unfortunately, this tells us nothing reliable about the stock market for 2010. (Unless, of course, this article is also a contrary indicator and the correlation comes roaring back next year.)

chart of the day, home market index vs s&p 500

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