Lately, I've been searching for answers about what causes boom and bust cycles in both the stock market and the economy. During my research, I've come across a couple of themes I'd like to share with you to clarify the current environment in both economic and investing terms.
The first theme is about cycles. I want you to picture an upright bicycle wheel divided into four sections, each represented by the seasons: summer, fall, winter, and spring. A market cycle is much like a seasonal cycle, rotating continuously. Let's dive in.
Summers in Arizona are scorching, sometimes lasting up to six months, with temperatures reaching as high as 125 degrees Fahrenheit during the day and 105 degrees at night. However, winters can be as short as two months, with temperatures barely dipping into the 40's at night. In Alaska, winters can last up to six months, with temperatures dipping below -40 degrees. Summers may only last two months, reaching a maximum of 70 degrees. Arizona and Alaska experience summers and winters, but the length and intensity are entirely different because they are in different climates.
Strong economic cycles are represented by spring and summer cycles. Spring represents economic recovery, while summer represents continued expansion. Fall represents the "FALL" from the top, while winter represents the slowdown, which could lead to a recession.
We are in the middle of Spring. Markets are pricing in an economy picking up steam. The Climate is represented by interest rates and credit availability, which, in this case, are turning positive, setting up for an extended Spring. The critical variable for spring is for inflation to remain disinflationary (flat or lower). Here are the charts to support my thesis.
Early Cycle Disinflationary Boom!
1) Spring: Renewed Speculation
The S&P 500 Index - representing the entire Equity Market is at All-Time Highs
On average, the market is up +14% after making all-time highs
Institutions that sat out the 2023 bull market are facing career risk. They are forced to chase good earnings. *Retail does not have this amount of capital.
2) Early Cycle Momentum 📈
New Order Demand rose sharply.
- First expansion in 16 months.
- Highest levels in 18 months.
New Order demand is outpacing production, reflecting upside momentum.
It also reflects margin expansion as corporate sales drain inventories faster than inventories can be made, eliminating the need to discount.
The S&P loves Margin Expansion
Zoom Out 👇🏽
3) More Early Cycle Momentum
1) New Orders Demand reflects leading momentum2) Retail Sales are reflecting an acceleration of goods purchasing3) Durable Goods Orders (ex-defense) support the retail sales demand4) Building permits and Housing Starts reflect a housing/real estate recovery.
4) Productivity Growth
1) The rise in Consumer Confidence reflects a positive consumer outlook on spending2) The rise in payrolls reflects employment momentum- Low unemployment reflects a high level of Employment; call it " Full- Employment."3) Labor productivity reflects Efficiency Gain ( increased output per unit of input)4) Add it all up, and you get GDP Growth Momentum
Q1 GDP projections jumped from 1.2% in Jan to 4.2% in Feb👇🏽
5) The Global Credit Cycle is Turning up: Climate
- The Level of Credit is rising
- The momentum of Credit is Rising
- Interest Rates have peaked, and Fed Liquidity is rising
Disinflation gives the Fed room to Cut Rates 👇🏽
6) Early Cycle Bets
Small Cap Stocks - $IWM Palantir - PLTR
Chainlink - LINK
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