What do home prices and NASDAQ stocks have in common?

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Hopefully nothing because…

…while the run-up in technology and biotech stocks recently has hit a brick wall and an IPO actually went down on its first day of trading (King Digital Entertainment maker of Candy Crush) home prices, while pausing for the past three months, are still heading in the right direction which is up!

And while a fews days of stock market action does not a trend make, the recent price performance in the stocks of some of the traditional darlings and high-fliers does present some cause for concern.

Watching these markets with more than just a casual interest I am reminded of the childhood game of musical chairs in which the goal is to find a seat when the music stops and, if you happen to be the last one standing, you are out of luck and lose.

NASDAQ stock market investors learned this lesson the hard way around the turn of the century, a time when internet stocks were globally loved and where every sell-off or dip represented a buying opportunity, that what goes up can come down.

For many stocks and many investors there was a great deal of financial pain as that Index went from a high just over 5,000 in 2000 to a low of 1,139 in 2002. And while it has rallied in bumpy fashion since that low to over 4,000 today, if you had paid the high for many of the well known names like Yahoo, Cisco and Intel they would be nowhere near year 2000 levels (See the historical chart of the NASDAQ and Yahoo below)!

Historical Chart of the NASDAQ stock market (Source: StockCharts.com)

Historical stock performance for Yahoo (Courtesy of Yahoo.com)

Real estate investors in most if not all US housing markets learned this same extremely painful lesson during the financial crisis that began sometime around 2006-2007 and which then gained true momentum with the failure of Lehman Brothers.

Prices in some of the most momentum driven markets such as Miami, Las Vegas and Phoenix basically collapsed while few if any other markets were left unscathed.

Prices have rebounded since then (see chart below) but many homeowners are still buried with underwater mortgages and others continue to face the prospect of foreclosure! So the question is whether we have we seen the bounce in prices and the best of the recovery is over or is there more to go?

Historical Case-Shiller and Zillow indices (Courtesy of Zillow.com)

Using an old cliche I suppose that if I knew the answer to that question I wouldn’t be writing this article but would be retired on an island somewhere.

What I do know is that typically nothing goes up or down in a straight-line and that this could simply be the pause that refreshes and that the rally in prices will soon resume.

Unfortunately, however, we all need to wait and see what happens but without question the Fed is going to play a major role in any answer as they attempt to guide interest rates going forward.

Note: By request this article was reposted at Global Economic Intersection

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