While this week brings reports on sales of new and existing homes in February, there are no signs of heightened anxiety in the stock market. That's a big change from one and two years ago, when these numbers were often horrific enough to send investors running. In recent months, traders have shrugged off some ugly figures. The reason: Steadying home prices are good enough for now.
The correlation between stock and home prices has been 0.91 since 1963. That is a very strong correlation. The correlation between the two assets, however, has fallen to 0.23 since 2000. This huge departure from the historical trend reflects the size of the "bubble" that formed in real estate by 2007.
For a definition of correlation please read.
Periods of disconnect tend to be symmetrical over time. That is, the significant out peformance of real estate into 2007, should be followed by an equal period of significant under performance before the tight correlation returns. There really is nothing to spin here, but the headline does give the appearance that stocks look and feel exceptionally strong. If this is spun as unexpected strength, it can easily be positioned as evidence of a stronger economy. I caution against this premature conclusion.
Source: finance.yahoo.com
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