Course Correction

Hell or bull market?... This flight is complicated... Sluggish home sales, but better than before... Other signs of recession... The soft landing 'looks less convincing'... Jerome Powell on deck... Gold, explained another way...

This 'landing' is complicated...

For about two years, you've probably heard the terms "soft landing" and "hard landing" – two possible outcomes of one of the most significant rate-hike runs in U.S. history...

The former represents the idea that significantly raising the cost of borrowing from near zero won't cause consequential economic damage.

The latter suggests it all goes to hell. Crisis levels of unemployment. Corporations struggling to create revenue. Maybe even riots in the street, the whole bit. Now that we write these words, it feels like we've already seen a glimpse of what a hard landing is considered.

But as I (Corey McLaughlin) will share today, the full experience may still be ahead.

At the very least, there's some drifting between hard- and soft-landing paths going on... It's as if Uncle Sam Airlines is veering before being "course corrected" as much as, say, Federal Reserve Chair Jerome Powell thinks it can be.

Take today's two major economic reports...

A report on U.S. home sales and manufacturing activity told two different stories...

Each month, the National Association of Realtors publishes data on existing-home sales. These are generally a good barometer for economic activity and a decent sign of its health. After all, most Americans' wealth is tied to their home or living situation.

Today's report from the association showed activity rose 1.3% from June to July, snapping a four-month sales decline that began in March.

This coincided with a slight drop in mortgage rates in the same period.

According to Freddie Mac, the average 30-year fixed rate was around 7% at the start of June, then 6.75% at the end of July (and today even lower... to 6.5%).

And that happened as market expectations have grown for the Fed to lower its benchmark bank-lending rate, not coincidentally by 25 or 50 basis points (0.25 or 0.5 percentage points).

Overall sales were still 2.5% lower than at the same time last year, but the median sales price for existing homes rose by about 4% to a somewhat staggering $422,600. Sales rose in the Northeast and West, though they slowed in the Midwest and South, as inventory remains slim.

Put it all together, and the Realtors' chief economist Lawrence Yun said...

Despite the modest gain, home sales are still sluggish. But consumers are definitely seeing more choices, and affordability is improving due to lower interest rates.

If anything, there might be some very small signs in residential real estate of another "take off" starting because of the mere thought of lower interest rates already. But don't get me wrong... We're very far from a booming real estate market. It's probably more like "taxiing."

The worse news...

Meanwhile, though, a widely followed, leading indicator of manufacturing activity in the U.S. – S&P Global's Purchasing Managers' Index ("PMI") – fell to 48. Anything below 50 is a sign of economic "contraction," or recession.

At the same time, the headline PMI – which also includes the services sector rather than just manufacturing – remained in growth territory, in the mid-50s for the fourth straight month.

These numbers are based on nearly live survey data of U.S. businesses about employment numbers, new orders, output, costs, and more. It's a "flash" report for August. Yes, this data is of the current month, which is why it's valuable to follow.

According to S&P Global, overall business activity has "remained robust" this month, and it doesn't see a big change in third-quarter GDP expectations for growth. But...

Growth disparities widened further, however, with the service sector expanding at a solid and increased rate while manufacturing output declined at the fastest rate for 14 months. Employment meanwhile fell as gloomier prospects in manufacturing led to a near-stalling of hiring there, while service sector payroll numbers fell amid hiring difficulties...

The report doesn't share specific job numbers, but employment data makes up 20% of the manufacturing PMI number. This month's report continued...

While falling employment in the service sector largely reflected difficulties hiring staff and replacing leavers, the cooling job market in manufacturing was driven by growing concerns about the business outlook.

That sounds more like a "landing" going astray... And it's possible evidence for the unemployment rate to keep marching higher. This won't be just a matter of "revisions," which we covered yesterday, but of more folks who want a job being unable to find one.

Then, at the end of this report, S&P Global Market Intelligence economist Chris Williamson offered this comment...

This "soft-landing" scenario looks less convincing, however, when you scratch beneath the surface of the headline numbers. Growth has become increasingly dependent on the service sector as manufacturing, which often leads the economic cycle, has fallen into decline. The manufacturing sector's forward-looking orders-to-inventory ratio has fallen to one of the lowest levels since the global financial crisis.

Ruh-roh.

I'm not going to chalk up the entirety of market activity to these two reports... But it's telling that the major U.S. stock indexes, which opened slightly higher, immediately turned lower after these looks at home sales and the economy were published early in the trading day.

The S&P 500 Index bounced around from there and all the indexes finished lower, with the U.S. benchmark down nearly 1%. The CBOE Volatility Index ("VIX") – a measure of options activity, bullish and bearish, on the S&P 500 – ticked above 17.

Volatility much?...

Just yesterday, we wrote to you about how our colleague, Ten Stock Trader editor Greg Diamond, is expecting more volatility in the months ahead. You should really check out Greg's upcoming free presentation next week for much more detail...

He's going to talk about how November's election might factor into market direction in the months ahead... market history going back to the late 1800s... all about his trading strategy... and much more. Register for it here now to make sure you don't miss it.

Just today, by the way, Greg told his Ten Stock Trader subscribers to close a trade on semiconductor stocks for "around a 30% gain." As he wrote...

Stocks continue to grind higher after the sharp reversal earlier this month. Tomorrow, Jerome Powell speaks at the Jackson Hole Economic Symposium, and we may see volatility around this event.

While stocks can still rally, I want to take some profit off the table on the recent market strength.

I won't speak for Greg, but I certainly consider the conflicting economic signals we're seeing – and more that may come – as a potential reason for an up-and-down market through the end of the year.

As he mentioned, here's another reason in the really short term...

Tomorrow, the 'big guy' speaks...

Tomorrow morning is a special time of the year, at least to many investors. It's when the head of the U.S. central bank delivers what typically is a speech that gives a decent outlook for the longer-ish-term vision from the Fed at an annual confab of central bankers in Jackson Hole, Wyoming.

Investors pay close attention to the messages from the Fed, and so will we.

As we mentioned on Monday, back at this meeting in 2020, the Fed said it was willing to let inflation run above its 2% goal until further notice. It "moved the goalposts," we said.

That notice ended up being a 40-year-high inflation rate.

In 2022, Powell went all Paul Volcker and doubled down on the inflation "fight." Until then, enough investors and traders – based on various "bear market rallies" we saw that year tied to premature rate-cut expectations – still didn't believe the Fed would push rates higher or keep them there for long.

Powell's message that August helped fuel newer lows in the bear market into that October.

What could happen this time...

This year, most folks expect Powell to suggest that it's a good time for interest-rate cuts. Based on what we've heard, I suspect he'll focus on the economy's "balance" and how inflation "progress" has been made, but now employment is as much of a concern.

Left for investors is the interpretation that the Fed is willing to add some juice to the economy by lowering its federal-funds rate.

If Mr. Market hears what he wants to hear – and what he has been telling Powell the Fed should say, as Dan Ferris put it a few weeks ago in his August 9 essay – the outcome could be bullish.

Anything beyond this ballpark of ideas or expectations, though, could be taken as a bearish surprise. There's a possibility of that, even if it's less likely than usual...

Powell's more "off script" comments can make folks scratch their heads (and buy or sell). But they're unlikely at Jackson Hole, since this is a fully prepared speech and Powell rarely takes questions from reporters afterward like at a typical Fed policy meeting.

That said, you might remember that a year ago at this confab, Powell described himself as a centuries-old sailor who was navigating the seas "by the stars under cloudy skies," implying that he had no earthly clue what would happen with the economy.

I wonder if or what analogies we'll hear this time. I sincerely can't wait.

Two sides of the same coin...

Subscriber Bernard B. wrote in with a great response to parts of Tuesday's edition – where we talked about gold trading at all-time highs. In his view, gold at all-time highs "is really correctly said as: our currency-unit-dollar has devalued to all-time lows."

Bernard also took the time to write his own Digest "headers" as we like to call the brief little blurbs at the top of each issue that tease what we're talking about each day. He wrote...

And the run could just be starting...

Is really correctly said as: our currency-unit-dollar is going to devalue even faster now.

A few catalysts for gold bulls

Is really correctly said as: A gold bull knows they can protect themselves somewhat from this currency-unit-dollar devaluation by owning a real thing that will take more currency-unit-dollars later to buy, thereby maintaining that amount of worth.

The politics of the situation

Is really correctly said as: Both political parties will continue to blame inflation, not their creation of our very troublesome national debt problem by their borrowing multi trillions of new currency-unit-dollars into existence, doing exactly what all currencies are designed to do, lower the purchasing power of every single currency-unit-dollar already in existence.

Inflation fuel from both sides

Should be correctly said as: We should stop using the term (inflation) when the correct term is really (currency-unit-devaluation fuel from all sides).

You won't hear any argument from me... I think we're saying the same thing, even if we're using different words.

My hunch is we'll hear about more "fuel" tomorrow when Powell starts talking.

New 52-week highs (as of 8/21/24): Automatic Data Processing (ADP), Agnico Eagle Mines (AEM), Brown & Brown (BRO), CBOE Global Markets (CBOE), Colgate-Palmolive (CL), Coca-Cola Consolidated (COKE), Cintas (CTAS), CyberArk Software (CYBR), Direxion Daily Real Estate Bull 3X Shares (DRN), VanEck Gold Miners Fund (GDX), Barrick Gold (GOLD), Intercontinental Exchange (ICE), Intuitive Surgical (ISRG), Kellanova (K), Coca-Cola (KO), Eli Lilly (LLY), Altria (MO), VanEck Morningstar Wide Moat Fund (MOAT), Newmont (NEM), NVR (NVR), Novartis (NVS), Pembina Pipeline (PBA), Planet Fitness (PLNT), Royal Gold (RGLD), Seabridge Gold (SA), Sherwin-Williams (SHW), iShares 1-3 Year Treasury Bond Fund (SHY), S&P Global (SPGI), SPDR Portfolio S&P 500 Value Fund (SPYV), Torex Gold Resources (TORXF), Trane Technologies (TT), The Trade Desk (TTD), Texas Instruments (TXN), Veralto (VLTO), Vanguard Short-Term Inflation-Protected Securities (VTIP), Consumer Staples Select Sector SPDR Fund (XLP), Utilities Select Sector SPDR Fund (XLU), and Health Care Select Sector SPDR Fund (XLV).

In today's mailbag, more feedback stemming from Tuesday's Digest, which also discussed politics, inflation, and fiat currency... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Back in the days of money (1970) I could buy a gallon of gas for about one silver quarter. Today, I can get about 1 1/2 gallons of gas for the same quarter. So in REAL money terms, gas is cheaper. But using debased currency, things are funky. I prefer real money. It's just more honest." – Subscriber Tim P.

"Hi Corey! Thanks for the update on gold investing.

"I also think silver investments might be good at this time since the price of silver tends to rise with the price of gold even though the old traditional gold/silver ratio has not been in alignment for several years. Demand for silver continues to increase as demand for industrial uses continues to grow. However, silver doesn't seem to ever move as fast or as far as gold prices.

"During normal times, i.e. when there is far less political turmoil than we are experiencing in America and most of the world today, gold prices in America move inversely to the value of the U.S. dollar relative to other currencies in its basket of currencies. However, the 'X' factor influence on gold prices, that is, political unrest, is now eclipsing the value of the dollar relative to other currencies.

"I think President Trump has the right idea and that is to create, or adopt, a cryptocurrency to be used for international trade. The end of fiat currencies has been brought on by America's mismanagement of the dollar for far too many years." – Subscriber Michael U.

Corey McLaughlin comment: Thanks for the note, Michael. Good thoughts. I have just one thing to mention about silver. Many analysts say that silver is typically more volatile than gold, and I agree with them.

The market cap of the global silver supply is roughly $1.5 trillion, about a tenth of gold's total value.

When the price of silver moves – in either direction – it really moves and usually by more than gold. Watch the price action of both for a few weeks and you might see what I mean.

But I won't argue with a good case for owning "hard assets" of any kind in our fiat-currency world.

All the best,

Corey McLaughlin
Baltimore, Maryland
August 22, 2024