Sentiment among our clients has not changed much. The plurality of our clients remain skeptical and see a multitude of problems ahead (see discussion below). But our view remains that we see a 2H rally leading to new highs for the S&P 500. We believe this will be led by FAANG/Large-cap Technology and Growth. And while we like Energy for next 2-5 years, we see headwinds unless oil recovers strongly.
- This tweet shared by @krugermacro Alex is hysterical
- But actually reflects our view
- Inflation was the single biggest headwind for markets in 2022 and the inflection is the key to market recovery
- hence, our inflation dashboard remains an important part of the toolkit
Chicken wing prices fall -62% from peak to below pre-pandemic = deflation. Is inflation not as “sticky” as many fear?
Market Rebellion @MarketRebels posted this tweet below quoting NBC News:
- chicken wing prices have dropped below pre-pandemic levels
This is outright deflation. Prices falling to 2019 levels is a 3-year decline.
In fact, chicken wing prices are down 62% from their peak in 2021.
- yup, down -62%
- that is not “cooling” inflation
- that is deflation
August Philly Fed better than expected on activity + price
And the August Philly Fed is overall encouraging. As shown below:
- activity has recovered to positive +6.2 vs -12.3 in July
- Prices paid and received have both declined
- Prices paid fell -9.6 to 43.6 (below 50)
- Prices received fell further to 23.3 and down -10 from prior month
Again, pointing to the fact that prices are not as “sticky” as consensus believes.
Many believe today is analogous to 2008, where economic weakness was only “set to worsen”
This week, in multiple conversations with investors, many were quick to cite that:
- in August 2008, economy was still posting growth
- therefore, the fact that the US economy has not faltered yet, doesn’t mean 2022 will not turn into calamity
- investors cite the above to explain their “bearishness” on fundamentals today while markets seem “oblivious”
While many might think investors were “oblivious” to the coming decline in August 2008, that is not the case. Take a look at the jobs market, for instance:
- labor markets stalled in June 2006
- jobs growth turn negative in July 2007
- by August 2008, the economy was 26 months into sustained and visible economic weakness
In other words, by August 2008, any expectation for a soft landing was counter to prevailing trend. This is not necessarily the case today.
Too many are carrying 2008 hammers
Taking a step back, we have many investors who believe 2022 is a more dangerous situation than many times in “one’s career” because:
- Fed raising rates
- Inflation still out of control
- Russia-Ukraine war will not end soon
- China is weak
- US economic data about to “fall off a cliff”
- Stocks still expensive with P/E >12X
While the above might indeed become a formula for sustained weakness, this is not necessarily the case today. But we can’t help feel investors are still quick to pull out their “2008 hammers”
- this was the case in March 2020, when investors said this was only the start of a bigger decline ala 2008 and 1929
- now with markets bouncing, there are too many saying this is a “head fake” and similar to 2008
HOUSING: Housing is weakening, but not falling from the same heights as 2008
The latest existing home sales data (July) shows further signs housing is cooling.
- total sales down to 4.81 million vs 5.12mm last month and 4.86 million consensus
- difficult for anyone to make the case housing is set to accelerate again
- but makes sense with higher interest rates and tightening lending standards, home prices and home activity will be cooling
HOUSING: Redfin data shows many cities showing record number of homes with “price drops”
Our data science team, led by tireless Ken, has updated the latest listing data from Redfin. The table below is based upon city/metro area and sorted to show which metro areas/cities with the largest share of price drops:
- Formerly red hot cities top the list of cities with price cuts
- top of the list is Boise, ID at 71%
- And similar to other data, shows housing prices are weakening
- this reflects the simple fact that with higher mortgage rates (impacting affordability) along with tighter lending and less certainty, selling prices need to decline
And below are selected instances of the trends in some cities:
- Boise
- Austin
- Las Vegas
- These 3 cities were among the hottest in 2021
DISINFLATION: Cooling housing should lead to falling CPI
There is a lag, but as shown below, as housing cools, so will CPI related to housing. In other words, those arguing that CPI will stay elevated for a long time are overlooking that CPI for shelter will respond to housing softness:
- there is a lag, and per our data science team, as much as 24 months
- but this lag is arguably a statistical artifact
- the “real” leading indicator is home price
…and this is not lost on the Fed
And this is not lost on the Fed. As this below report by Dallas Fed shows, they see a roughly 19 month lag between home prices and OER/rent inflation:
- they see a 19-month lag
- if so, then Fed will not be solely looking at CPI rent/OER
- they will look at leading indicators
This is a reminder that the Fed is not only watching “hard” data reports like CPI. But all the leading indicators.
But just because housing is cooling, doesn’t mean this is 2008 again
But just because housing is weakening, doesn’t mean this is 2008 again. Take a look at residential construction as % of GDP, since 1951:
- Today, construction is 4.69% of GDP, below the 75-yr average of 4.91%
- In 2005, this figure posted the highest ever share at 6.68%
- and with GFC, this fell to 2.5% or down 4.31pp of GDP
- This is the reason housing crushed the economy and households in 2008
- In 2022, housing activity is still below long-term average
Figure: FSInsight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019
* Portfolio strategy introduced in December ’19 rebalance, replacing 2019 portfolio recommendation – “FANG in odd years”
