Interesting comments from Jeff Saut of Raymond James. Saut says we’re likely to see a repeat of 2010 and 2011 as recession fears are ultimately quelled and the market rallies into year-end. Saut says two important industries are giving us the clue – autos and housing. And neither points to recession at present (via Raymond James):
“Indeed, “your father’s” recession, and subsequent recovery, saw the two sectors that pulled the economy out of recession, namely autos and homebuilding, recording strong rebounds. Beginning in 2009 autos have done their job since we have gone from roughly a 9 million unit seasonally adjusted annual rate (SAAR) to nearly a 15 million run rate. The laggard has been homebuilding, but that appears to be changing. The Homebuilder’s Index is breaking out of a four-year base to the upside, suggesting the worst has been seen and discounted. Meanwhile, one of the things that got us cautious on housing was the rise in For Sale Inventory that began in mid-2005. Now, For Sale inventories have collapsed (see chart on page 3). The second thing that got us cautious on housing was the rise in the cost of a house at the same time inventories were increasing. Affordability, however, is currently at record levels (see chart on page 3). Such metrics have caused a noticeable improvement in sales. Recent reports indicate new home sales continue to accelerate. The seasonally adjusted annualized pace of new home sales (contract signings) rose 7.6% month-over-month to 369,000 units. Drilling down to the unadjusted data, May sales jumped 25% y/y and increased 6% sequentially, indicating that the positive momentum in housing has continued to build in recent weeks. Moreover, these results came as prices rose, with the median new home price climbing 5.6% y/y to $234,500 in May, which was an acceleration from +5.0% y/y in April. These are not unimportant data points because a pickup in homebuilding would not only add jobs, but should strengthen future GDP numbers. Also helping the economy is gasoline, which has fallen from $3.43 per gallon in April to $2.63 currently (basis the August futures contract). That decline is tantamount to a huge tax cut since every one penny decline in price adds approximately $1 billion to consumers’ purchasing power.
Given such metrics, I expect the same outcome that occurred for the past two summers. That being, recession fears, which caused those previous mid-year declines in equity prices, should give way to no recession with an attendant rise in equity prices. And, the rise may have already begun.”
Source: Raymond James
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.