How to Win in a Recession

The S&P 500 hits a new all-time high again... What's next?... A 'vital crossroads'... Beyond 'Big Tech'... Homebuilding is still booming... Home Depot and Lowe's beat expectations by $7 billion... 'A downturn is a terrible thing to waste'... How to win in a recession...

New highs are here again...

The benchmark S&P 500 Index closed just above its pre-pandemic high yesterday, marking one of the wildest six-month round trips imaginable...

The index cratered almost 34% over five weeks between February and March... And now, roughly five months later, it has fully recovered from its lowest point.

This behavior is what many market observers consider the official start of a new bull market. And many of those same folks will retroactively back-date the start of this new bull market to the previous low on March 23... meaning that we experienced the shortest bear market in history and that this bull market is already up more than 50%.

Timing definitions of these things aren't exactly cut and dry. They also aren't the most important use of our time... nor is labeling them indicative of what's really going on.

After all, the tech-heavy Nasdaq Composite Index has been at new highs since June 5... And at the same time, traditional safe havens (like gold) and defensive assets (like inflation-protected bonds) have been hitting new highs, too.

It's a wild time, for sure, but remember... all the bills will come due eventually.

The deep-rooted problems of our financial system are still there. But as it turns out, the trillions of dollars that the Federal Reserve pumped into the financial system is going places in the meantime... just as we thought it would.

Back in March, just a few days from the major U.S. index's ultimate bottom, our founder Porter Stansberry said...

I wouldn't be surprised to see stocks at new highs by the end of this year.

And he continued...

This is like hitting the pause button. It might take 60 days to get everything back to normal, but the market's going to look past that... There is no permanent change to the U.S. economy or world economy.

We're not talking about a permanent disruption to trade between China, America, and Europe. This is all going to go away. As soon as that becomes really clear, and the timetable for that going away can be plotted, stocks will rebound.

That is exactly what has happened. We may not like how long it looks, but the timetable for "this is all going to go away" has been plotted in a way that investors can wrap their heads around.

The markets can work with that.

The question now is... What's next?

This feels like a critical moment. The major U.S. indexes are indicating roughly the same outlook that they had back in February before the COVID-19 panic arrived.

Whenever this question comes up, especially in the short term, we like to check out the daily work of our technical analysts...

As we've written before, this brand of analysis is perfect at identifying what can happen in the broader market, a specific sector, or even a single stock, based on historical trading patterns and key supply and demand levels...

Understanding "what the chart looks like" can help you decide whether now or later would be a good time to buy or sell any number of assets that you already love... or that Wall Street hates.

And if you've been following the daily work of our technical analysts, you'll know that we've seen "sector rotation" lately.

It's a hallmark of a bull market when money flows out of one or more sectors into others in an identifiable pattern. For instance, on Friday, Ten Stock Trader editor Greg Diamond wrote to his subscribers...

It's pretty amazing how you can just "see" the capital flow out of Tech and into Transports/Industrials/Banks – we'll see how long this keeps up, but if it does (as I said yesterday/this morning), the market can grind higher into the end of the month.

Greg also said he's watching for signs of a short-term top, but he hasn't seen them yet.

Similarly, Stansberry NewsWire analyst Mark Putrino recently noted the significance of health care stocks breaking out to new highs...

The Health Care Select Sector SPDR Fund (XLV) is trading just slightly above $107 per share, a key historical "resistance" level – a marker of demand. As Mark wrote yesterday...

If this breakout holds, it would mean that a large concentration of sellers has left the market. With this supply out of the way, buyers will have to pay up if they want shares. This will cause XLV to rally.

At 14.4% of the S&P, health care is the second-biggest part of the index. If it keeps moving higher, it will pull the SPDR S&P 500 Fund (SPY) to new all-time highs.

Today, Mark said the SPDR S&P 500 Fund is at a "vital crossroads." The $339-per-share level is critical to watch over the next few weeks to see whether the rally back from the bear market will continue...

If SPY continues to move higher, it will inevitably experience some profit-taking. That's when we'll see if the current levels will offer support.

If this happens, expect the rally to continue. But if not, the market could sell off as we move into September.

A lot has been said about 'Big Tech' lately and in the last 20 years...

And it's all warranted...

Tech giants Facebook (FB), Amazon (AMZN), Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOGL), by market cap, make up roughly 25% of the S&P 500 Index today. That's up from about 17% in January.

As we've said before, it's important to know about the composition of the index (and any index or fund that you may own).

This recent rise in the S&P 500 for the tech giants creates danger of overexposure, even for folks who think they're properly diversified in something like an index fund.

Yet at the same time, 75% of the benchmark index is still "other things." The fact that the S&P 500 has caught up to the Nasdaq in reaching its pre-COVID-19 highs reflects at least some optimism in sectors other than technology.

And we can't think of another sector that has actually been helped tremendously by the recession than the homebuilders...

Nearly every metric we've seen over the past few months about homebuilding has showed some type of all-time high. We wrote about this trend as far back as the May 21 Digest, when we said, "The home biz is booming."

Most recently, the National Association of Home Builders' ("NAHB") Housing Market Index – a measure of homebuilder sentiment – rose from 72 in July to 78 in August. That's a new all-time high, and it's also above Wall Street analyst estimates. As NewsWire analyst Nick Koziol wrote last week...

Homebuilders continue to see (and expect) elevated demand for housing. Record-low mortgage rates continued to support housing demand.

Low mortgage rates make it easier to finance a home purchase, pulling prospective buyers into the market before rates increase again.

NAHB Chairman Chuck Fowke said buyer traffic is at an all-time high as a result.

We can't underscore how significant this is for the underpinning of the U.S. economy...

Like the health care industry, which our colleague Thomas Carroll described in yesterday's Digest, the housing industry directly accounts for roughly 20% of the U.S. economy and impacts plenty of areas beyond construction. NewsWire editor C. Scott Garliss wrote about this trend recently in Dr. Steve Sjuggerud's free DailyWealth e-letter.

Scott has family and friends in the construction world who have told him that they can't keep up with demand. The data we see back up the anecdotes we've heard from Scott and others. As Scott wrote last week...

According to the [NAHB], the housing sector directly accounts for roughly 17% to 18% of national gross domestic product. And that doesn't account for all of the secondary groups affected by housing demand.

So, if housing is rebounding, it's a good thing for the economy. It spreads throughout the economic chain, through things like furnishings, lighting, lawn service, food delivery, beverage consumption, and vacations, among others. All that spending will translate into new jobs and better wages, aiding the cycle.

Now, of course, this has all been fueled by the Fed's rock-bottom interest rate policy, which has encouraged investments in real estate and other "hard assets."

If we think of the Fed as a doctor with a needle, we can cringe at the long-term effects of Dr. Fed's course of treatment for the economy and the wealth gap in this country. But remember, the central bank has indicated low rates and "easy money" policies will be in place for at least the next few years.

That means continued big-picture tailwinds for the housing industry and its related stocks, like the major home-improvement retailers...

This week, Home Depot (HD) and Lowe's (LOW) posted blowout second-quarter numbers...

Lowe's, the longtime No. 2 retailer in the space, beat Wall Street revenue expectations by $3 billion... And its same-store sales were up 24%. Industry leader Home Depot beat revenue expectations by $4 billion... And its same-store sales rose more than 23%. As Nick from our NewsWire team reported...

[Home Depot] CEO Craig Menear called the second-quarter sales "record breaking," adding that the company's investments in its supply chain have allowed it to maneuver the pandemic and meet the high demand.

What's more, at least one cellphone data-tracking company says foot traffic to Home Depot has risen 35% since April. Shares of Home Depot are up 86% from the stock's March low, and they started hitting new highs in late May.

Longtime readers know that Home Depot, in particular, has been a favorite of a few of our editors...

Our colleague and Extreme Value editor Dan Ferris recommended Home Depot in July 2019. When he did, he wrote extensively about the company's supply-chain improvements and inventory management, which it worked on over a decade ago during the financial crisis...

The collapse in spending on large discretionary items (like a remodeled kitchen) in 2007 and 2008 forced Home Depot to quickly shift its focus from expansion toward execution and cost-cutting. There was no better place to start looking for ways to improve efficiency and lower costs than the supply chain. As then-CEO Frank Blake quipped, "A downturn is a terrible thing to waste."

So frankly, it doesn't surprise us at all that Menear, the company's current CEO, referenced supply-chain strength (especially during an economy-upending pandemic) as a reason for Home Depot's ability to keep up with demand lately.

I (Corey McLaughlin) also experienced this first-hand a few months ago... I found some pressure-treated lumber at Home Depot after I couldn't find the same product at Lowe's that day.

How to win in a recession...

A decade ago, Home Depot made the decision to take more control of its supply chain, redirecting shipments from vendors to central Home Depot Rapid Deployment Centers ("RDCs") instead of to individual stores. This made everything more efficient for the company... and even better, its shareholders. As Dan wrote in Extreme Value in July 2019...

Remember, inventory is a major use of cash for a big retailer like Home Depot. Reducing inventory frees up that capital for better uses, like growing the business, paying dividends, or buying back shares.

Dan followed that analysis up with these words – which he wrote in bold, for good reason. They are as true today in our current crisis as they were during the last one...

The ability to adapt quickly and decisively to new market realities and to effectively allocate capital in a huge recession are hallmarks of an exceptional management team and a winning corporate culture.

Today, Home Depot is doing it again... Earlier this month, the company said it will open three new distribution centers in its home base of Atlanta alone over the next 18 months to support demand for flexible delivery and pick-up options. It plans to hire 1,000 new employees.

Back in 2018, Home Depot announced a $1.2 billion investment to expand its distribution network with approximately 150 new supply-chain facilities nationwide. It aimed to expand the company's existing same-day and next-day delivery options to 90% of the U.S. population.

In making the most recent announcement, Stephanie Smith – Home Depot's senior vice president of supply-chain development and delivery – said...

Retail has changed more in the past four years than in our company's 40-year history. Customers expect to shop whenever, wherever, and however they want – whether they're buying a hammer or a pallet of pavers.

When a company that has these "flexible" hallmarks is operating in a sector that is being fueled higher by huge economy- and market-moving central-bank "easy money" policies, that's how you win in a recession.

Amazon, maybe more of a logistics company than anything else, did the same thing early on in the pandemic... when it delayed new shipments of nonessential products.

So did Microsoft, when its cloud services suddenly were overloaded with kids taking classes at home. The tech giant had to beef up its capacity.

And it was much the same story with Zoom Video Communications (ZM), which got its "zoom bombing" security flaw under control after it gained 200 million daily meeting participants practically overnight.

We can say the same thing for individual investors as Dan does about companies... The ability to be flexible in a changing environment is an invaluable trait to have.

That's true whether it's through the technical analysis that we mentioned today from guys like Greg or Mark... or Dan's more longer-term value-investing approach. It's beneficial for you to see what direction the market is heading next, and the companies that will thrive within the trend.

Today, Dan has another 'lesson' on his mind...

Regular Digest readers are familiar with Dan and the wisdom he dishes out here each week. And of course, many others know him as the host of our Stansberry Investor Hour podcast.

Well, Dan recently sat down with our video team to share even more wisdom on camera...

In the video, Dan details the lesson he learned when he nearly went completely broke years ago. I say "nearly" only because he had a few hundred dollars to his name after this mistake that he says he'll never forget.

Dan has never spoken publicly before about this situation until now, so it's worth a listen for that alone. But he also covers a massive opportunity today that 99% of people will miss... It could return more than 1,500% from owning "one of the best businesses on Earth."

If you'd like to see and hear what Dan has to say, click here to get started.

Wall Street's Reaction to a Biden-Harris Ticket

Our colleague Thomas Carroll and Enrique Abeyta of Empire Financial Research discuss Joe Biden and Kamala Harris as the Democratic ticket for the White House in 2020... and what it could mean for investors.

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and follow us on Facebook, Instagram, and Twitter.

Baltimore, Maryland
August 19, 2020