Taking a short break

Happy Friday!

I’m taking this week and next off from writing (quasi-summer break), but if you’d like an evergreen piece, just let me know. Happy to send along a few.

Moving along…

Let’s HOPE for a soft landing

This stellar graphic from Piper Sandler depicts the roadmap for how the economy responds to rate changes. 

Housing tends to slow first, followed by New Orders and then Profits. Employment softens last. 

This happens consistently because as rates start rising, housing becomes less affordable because mortgages are now more expensive. Many believe housing is the economy because buying a home means hiring plumbers and wasting endless Saturday afternoons at hellholes like Home Depot and, God forbid, Bed Bath and Beyond (not stock advice).

If people buy less stuff, then new orders to replenish shelves start to fall. This eventually makes its way to the bottom line for corporations. Smaller profits put pressure on their P&L, so they cut costs. 

Employees tend to be the biggest or second biggest expense for companies, so they get axed since most salaried employees are fixed costs that impact operating leverage when sales weaken. 

Hard to say precisely where we are, but last week, we discussed the idea that housing is already in a recession. We’ve also seen weakness in new orders – albeit not as broad-based as housing. Also some profit weakness (but even less so than new orders). There’s been little to no degradation in employment trends (yet).

To be clear, this is by no means a guide to trade the cycle. The timeframes vary, and it’s not always linear. It’s just meant to offer a roadmap built on economic indicators.

Are we in the clear?

Here’s another stellar table from Ryan Detrick

The S&P 500 recovered 50% of its bear market loss in early August. He claims this is a good sign because stocks have never moved back to new lows after this happened (middle column with all the “no’s”). 

He also shows that the average return one year later has been higher 100% of the time and up 19.3% on average (bottom right of the table).

Now, there’s a first time for everything, but think about why this has been so consistent. Markets anticipate a future bad thing, but they almost always overreact; too much panic gets priced in, the bad thing starts to happen but not as bad as what was priced in, and by then, the market is already pricing in the recovery.

Hard to say what will happen next, but I’ll take any positivity on a day like this.

Enjoy the weekend…