Do Newly Built Skyscrapers Signal The Top of the Stock Market?

Have you heard of the Burj Khalifa in Dubai?

It’s the tallest skyscraper in the world at 828m (2,717 ft), and it was completed in 2009. The price tag was a whopping $1.5 billion, making it one of the most expensive buildings of all time.

For these bold projects to get the go ahead, global financial conditions have to be just right. Record-breaking skyscrapers can take multiple years to build, and things can change drastically from start to finish.

In this case, construction of the Burj Khalifa started in 2004. By the time it was completed, however, the financial markets were in ruins. Lehman had collapsed, and rescue efforts such as TARP and QE were in full force to try and stop the bleeding. Between October 2007 and March 2009, the Dow Jones Industrial Average lost 55% of value.

The crisis didn’t only bankrupt financial markets – it also took its toll on competing projects that aimed to unseat the Burj Khalifa as the world’s height record-holder. For example, One Dubai Tower A was supposed to be a whopping 1,008m (3,307 ft) tall – but it was shelved in March 2009 once it was clear that global financial conditions would not be improving any time soon.

Do Newly Built Skyscrapers Signal The Top of the Stock Market?

Could record-setting skyscrapers signal economic over-expansion and a misallocation of capital?

EWM Interactive, a subscription service focused on technical analysis, thinks so. The following infographic follows the “Skyscraper Curse” through six different market tops and subsequent crashes over the past century.

It is gigantic in size, so please click here or the below image to access the legible version:

EWM Interactive sums up the infographic with these words:

In the market, extreme optimism results in price bubbles. One of the real-life manifestations of extremely positive social mood is the construction of enormous buildings. Market tops and skyscrapers often seem to emerge simultaneously, because both phenomena are the result of the illusion of infinite prosperity. But extreme psychological conditions do not last very long. That is the reason why record-breaking buildings, whose construction starts during a market bubble, are often completed after the bubble’s collapse.

That said, there are counter-examples that show the “skyscraper theory” is not perfect.

The recession after World War I, the recession of 1937, and the recession in the early 1980s were not correlated with any record-breaking skyscraper projects. An empirical test in 2015 that looked at the theory found that record-setting skyscrapers did not correspond directly with the business cycle.

Let’s hope that they are right, since the Jeddah Tower – a 1,008m (3,307 ft) monster in Saudi Arabia – is expected to unseat the Burj Khalifa as the world’s tallest building by the year 2019.