Stocks and the Economy Can't Both Be Right
A big 'divergence' we're watching now... More signs of a slowdown in housing... Stocks and the economy can't both be right... Stay long, but stay safe... In the mailbag: Readers respond to our latest Report Card...
It may be the most important 'divergence' in the U.S. right now...
On one hand, stocks have surged higher for the past two months, suggesting nothing but blue skies ahead.
On the other, many "real world" data points – ranging from corporate earnings projections to retail sales to consumer-loan delinquencies – suggest the U.S. economy (and the world at large) is now slowing dramatically.
Some of the most concerning signals have come from the housing market...
While it doesn't make up as large of a percentage of the U.S. economy today as it has in the past, housing (and its related industries) still represent more than 15% of total U.S. gross domestic product.
In other words, if housing begins to struggle, it's a good bet the broad economy will, too. And two important measures of housing-market strength fell to multiyear lows at the end of last year. As we noted in the January 31 Digest...
Last week, the National Association of Realtors ("NAR") reported existing home sales plunged to three-year lows in December. Yesterday, the NAR warned that pending homes sales slowed even more dramatically last month...
According to the report, pending sales – which are an indicator of closings one to two months in the future – fell 2.2% last month. This represents a dramatic year-over-year decline of 9.8%. Worse, it happened despite a significant drop in mortgage rates, which tends to incentivize buyers.
Pending sales have now fallen for 12 straight months. They now sit at their lowest levels since 2013.
Today, we learned that a third important metric has confirmed these moves...
So-called "housing starts" also dropped to multiyear lows in December. As financial-news network CNBC reported this morning...
The number of homes being built in December plunged to the lowest level in more than two years, a possible sign that developers are anticipating fewer new houses to be sold this year.
The Commerce Department said Tuesday that housing starts fell 11.2% in December from the previous month to a seasonally adjusted annual rate 1.08 million. This is the slowest pace of construction since September 2016.
Over the past 12 months, housing starts have tumbled 10.2%. December's decline occurred for single-family houses and apartment buildings. Builders have pulled back as higher prices have caused home sales to slump, suggesting that affordability challenges have caused the pool of would-be buyers and renters to dwindle.
Now, history suggests this divergence can't continue for long...
Either new data will show that stocks were right, and last quarter's slowdown was simply a temporary speed bump... or they'll confirm that the global economy is indeed slowing, and the recent rebound in stocks was little more than a bear market rally fueled by hope.
Regular Digest readers know where we stand...
Given the unprecedented excesses in both the credit and equity markets today, we believe any signs of weakness should be taken seriously. And we would much rather give up some potential upside by remaining cautious today than risk being unprepared for another sharp sell-off like we saw in December.
For now, our general advice remains the same...
Feel free to speculate on a "Melt Up" (if you can afford to do so), but be sure to size your positions appropriately...
Keep the bulk of your equity portfolio in high-quality stocks trading at reasonable valuations...
Add in a larger-than-usual cash position, some gold, and a few "hedges" – and, of course, keep an eye on your trailing stops – and you'll be well prepared to take advantage of whatever opportunities the market presents in the months ahead.
New 52-week highs (as of 2/25/19): Ionis Pharmaceuticals (IONS), Ingersoll Rand (IR), Kirkland Lake Gold (KL), MarketAxess (MKTX), and Motorola Solutions (MSI).
Several subscribers have shared their thoughts on our latest annual Report Card. If you still haven't had a chance to read it, be sure to catch up here (Part I) and here (Part II). As always, send your notes to feedback@stansberryresearch.com.
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Regards,
Justin Brill
Baltimore, Maryland
February 26, 2019