Home Sales Dropping - A Bad Sign for the Stock Market.

The stock market and housing market are closely tied together. When homes are selling, the stock market is usually doing well. This makes sense because when people are buying and selling homes, they are buying new furniture, updating appliances and hiring people for renovations. All these things stimulate the economy and increase business earnings. Therefore, when housing is booming so is the stock market (typically).

The Fed has spent the last year raising interest rates to 40-year highs. High interest rates are discouraging people from buying and selling homes. The graph below shows existing home sales YoY collapsing.

This graph below shows existing home sales and S&P500 12-month trailing operating earnings per share. What is interesting about this graph is that you can see when home sales dip so does the S&P 500.

If the graph above stays consistent, then we are roughly looking at a 28% drop in the S&P 500 over the next year. Since housing and consumer spending (stock market) are major aspects of the economy or GDP, we are more than likely to see a recession over the next year. The severity of the recession is hard to predict but a recession (two quarters of negative GDP) is more than likely. Also, historically speaking, for mortgage rates to drop, the economy first must enter a recession, as the Fed only eases monetary policy during rapid economic deterioration. Below is a graph showing this.

Overall, the unaffordability of the housing market is going to drag the stock market into the red unless there is a Fed pivot. Unfortunately, the Fed has made no indications that a pivot is in the future. The best-case scenario is a mild recession with limited job loss that acts more like a reset, but we will have to wait and see.

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