Now, this isn’t an entire blanket statement I am making here. We have many stock traders that understand economics and how the business cycle works. However, I am afraid some of them are not correctly reading the economic data and making the end of the business cycle peak stock calls in this cycle too much.
My dual mandate is to talk about the housing market and how the economic cycle is looking. My blog is free, my facebook & Instagram page is open to the public, I don’t do a subscribe-podcast, and I don’t forecast the S&P 500 targets or give specific stock advice for money.
The only time on my twitter account recently that I gave a specific stock call tied to housing was when ticker symbol TOL (Toll Brothers) was recently downgraded to a sell-by Citigroup to $29, and the stock was trading at $29. This can be easily verified on the twitter account. I talked about how this was the time to get into TOL, and when $TOL tried to break over $39 the second time around, I sold that trade, and I was done with that. The only reason I did is to make a point that the housing cycle isn’t peaking here even though the data did look recessionary, sales were too low to call a top in housing.
I created two stock videos in the cycle because both times, the Bears went crazy again, 2016, with the PMI recession and late 2018 with when the stock market was down almost by 20%. They were done begging the American bears to call for their recession once again.
The business cycle and economics cycle move together, I stress this all the time to my bearish friends. Have a diverse economic model before saying Recession; this will prevent you from time-stamping recession calls that amount to the end of the business cycle, which means you can’t have another all-time high until after the recession.
Well, its almost Christmas again, and we are sitting here at an All-Time High!
When you stay an economic expansion bull long enough, especially during a cycle when we have had two different political parties in the WhiteHouse, you eventually become the villain to some. I’m ok and all good with that.
However, anything Perma means they don’t have an economic model. That is not me, the reason I have been a U.S. economic expansion bull for years is that literally, my six recession flag model has not forced me to say the word Recession.
My model can be found here, and I backtested all 6 flags vs. the Housing Bubble cycle to give people a specific timeline to each flag and when the stock market peaked and when the recession happened. They all have to come together, this is the diverse economic model factor people should have instead of making a macro top call based off of one jobless claims report, JOLTS, jobs data, retail sales, etc., etc., etc.
The Recession Red Flag Model Vs. The Housing Bubble
I did, however, get this question about risk today. Shouldn’t people reduce their positions in stocks when the unemployment rate is low, and claims are low?
First, I don’t care about that, because that is not what I do. However, for the sake of conversation, I addressed this issue.
Yes, the unemployment rate is always the lowest before the recession happens. Duh! Come one now, this is a no brainer. We go into recession, the unemployment rate rises, stocks fall, and then the recovery occurs after.
This isn’t a valid thesis for calling a recession every week as the unemployment rate falls down during the expansion. The unemployment rate for me is one of my 6 recession flags, but I already checked that off a while back.
Doesn’t jobless claims and the S&P 500 move hand in hand? Another duh! Yes, claims fall during the expansion and rise during a recession. Yes, claims are shallow right now but have been historically low for some time. This isn’t a valid reason to call for a recession.
If you want to take risk off for your clients or yourself, nobody is stopping you. Just go to cash wait for claims to rise to a certain level, and once it starts to come down from a recent high and economic data gets better, out goes the cash to work.
However, that isn’t what I do. If I was asking you to subscribe to my blog each month for stock advice, then its fair game.
I talk about housing economics and the economic cycle with a specific 6 red flag recession model.
If you’re forcing me to give you something about stocks and economics. This is what I would say. If you’re an immediate recession bear, you don’t want to see the 10-year yield close above 1.94% and get follow-through selling. I have been stressing this level since the inversion happened in August.
Remember, the Inversion for me was a bullish event for the economy, and I had no problem stating that on that day. I had forecasted an inversion at the end of 2017 for 2018. I believe we inverted the yield curve in December of 2018, not in 2019. So, I have a totally different mindset on this event than others. In fact, when I forecasted the inversion at the end of 2017, I said when it happened in 2018, it will be the most prolonged period from the first inversion to recession ever. Now, I am working off 12 months into my first inversion cross over.
The inversion to me was bullish due to this premise, regarding the President and the trade war escalation.
However, for me to believe in the better growth story next year, not super growth, or record-breaking growth, just a tad higher in growth, the 10-year yield needs to close above 1.94% and get follow-through bond market selling. Until then, I won’t take that stance at all. We are working our way there but haven’t done it yet. Just notice how the bond market has been acting calmer since the inversion happened, the trade war tap dance has shown less risk of a significant escalation, and today, we are at an all-time high in the stock market. However, growth is slower this year than last year. The key is that there is a difference between growth slowing and a recession.
For you stock people, you can make the case that the market is more expensive with future higher bond yields (If that occurs), and that doesn’t warrant much upside until the real growth data shows up. That is a perfectly normal and okay thing to say. Instead of trying to make market top calls when you’re really trying to sell an overbought market place.
My Christmas wish, I need you American bears to get better.
At some point, I will be a short term bearish about the economy, but good god, please don’t spaz out like you did in this last cycle. It comes off as being soft.
So much of my next stage of economic work is based on adequately calling the recession/recovery cycle but showcasing how certain extreme people act during a recession.
Pretty please, have a better economic game in the next recession recovery cycle!
On a personal note:
I will be a contributor to HousingWire shortly, and the articles there are going to be different than what I write here.
Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data daily on his own facebook page https://www.facebook.com/Logan.Mohtashami