”There is a saying in Baltimore that crabs may be prepared in fifty ways and that all of them are good.”
― H.L. Mencken
“Indeed, the battle has been long like the war in Afghanistan….” Mark Skousen responded to Friday’s Missive, “and perhaps the Ukraine war!”
We begin today with a mea culpa. We should have known Dr. Skousen would write to us after citing consumer spending as a predominant driver in the US economy.
“This is an interesting quote from your report below,” our friend and founder of FreedomFest begins quite civilly, then continues (the ALL CAPS are his own):
“The retail sector and consumer spending, in general, make up 70% of US GDP. Discretionary consumer spending and communications make up nearly 25% of S&P 500 earnings.”
Why is it that consumer spending is 70% of GDP, and only 25% of S&P 500 “consumer” earnings?
Answer: GDP is NOT the complete measure of spending in the economy—it measures FINAL output only (finished goods and services).
To find out how important consumer spending is in the entire US economy, you need to use Gross Output (GO) as the more accurate denominator.
GDP leaves out all the B2B spending in the supply chain, which is bigger than GDP itself. If you use GO as the more complete and accurate measure of “total spending” or “total economic activity,” you find out that CONSUMER SPENDING IS ONLY AROUND 31% OF THE ECONOMY, which is interestingly, closer to the S&P consumer earnings percentage of 25%.
This is why I’ve been promoting GO as the true measure of total economic activity or total spending in the economy. It demonstrates that BUSINESS is far more important than consumer spending in the economy. SAY’S LAW WINS!
Here’s the chart for reference:
“Notice,” Skousen urges, “that Business Spending is bigger and more volatile than consumer spending.”
Like you, I had to look up Say’s Law to remind myself what the good doctor was saying.
In 1803, the economist Jean-Baptiste Say suggested, simply, that producing a good is enough to create its own demand for it. Say’s Law states: “Supply creates its own demand.”
A turn of the millennium later, Steve Jobs based his entire business strategy for the iPhone on it. “Some people say give the customers what they want,” Jobs reportedly said, “but that’s not my approach. Our job is to figure out what they’re going to want before they do.”
Apparently, Jobs was on to something. Today, Apple ranks 8th in the Fortune Global 500. Walmart and Amazon are 1 and 4 respectively, but both are largely logistics companies. The other 5 companies in the top 8 are all energy companies. Three of those are state-owned Chinese conglomerates.
Apple is the only company in the global top 10 that makes consumer products.
As he mentions, Dr. Skousen has been trying to get the economics community to use Gross Output (GO) as a more accurate measure of the “supply side” of the U.S. economy, rather than simply using consumer spending as I have done, habitually.
Never fear, Dr. Skousen is forging ahead with his quest to get people to understand and use Gross Output as a tool for forecasting, among other things recessions.
“I am making progress,” he reports, “having made the NYTimes a few weeks ago and just recently the Concise Encyclopedia of Economics.” You can find out more information on Mark’s project here: http://www.grossoutput.com.
Apologies to a friend.
Now, onward. Today’s essay is from Garret Baldwin, who is also the subject of this week’s Wiggin Session. Garrett is taking a stab at forecasting what we might expect from the stock market this fall, starting next week in September.
Cheers,
Addison
P.S. It’s crabcake season here in Baltimore, just one of the treats of returning to the Mid-Atlantic after a busy summer. Garrett wrote the analysis below on a recent visit from Florida.
Crabcakes & Volitility
by GARRETT BALDWIN
Greetings from Baltimore.
If there’s ever a reason to depart from the Florida Republic, it’s for a crab cake, yellow mustard, and crackers.
Provisions are well stocked in Charm City.
We enter a pivotal week for the markets. The Chinese central bank didn’t pump another 1 trillion Yuan into its economy, so the “trend” – or expected performance for the S&P 500 and Russell 2000 – is likely set for lower highs and lower lows. The Federal Reserve’s meeting in Jackson Hole, Wyoming, delivered no major updates – except our existing commitment to higher interest rates for longer.
Without a major move by central banks – and the meeting among the BRICS nations (Brazil, Russia, India, China, South Africa, etc.) largely being a bust – we can turn our attention to the more behavioral elements in the stock market.
September is coming.
With a week left before Labor Day, we must look at the chart to the left.
It shows the average monthly returns of the S&P 500 since 1928.
Most people think that October is the worst month.
They associate that month with the crash of investment bank Lehman Brothers in October 2008.
But it turns out that the average S&P 500 performance sits below NEGATIVE -1%.
Let’s back up quickly. What is seasonality?
Stock market seasonality refers to recurring patterns in stock prices based on specific times of the year. This is largely an anomaly. But the factors behind it include investor behavior, economic cycles, and events tied to specific months.
We know that if enough people believe something… it can become true. It can be a self-fulfilling prophecy. Even though we need to do more analysis when making investment decisions, it’s not stunning when performance is attributed to these phenomena.
For instance, the “January Effect” reflects historically strong January performances. This year’s rally in January was largely fueled by big capital injections by the Bank of Japan and the People’s Bank of China… BUT – seasonality helped add some fuel to the fire.
Then, the “Sell in May and Go Away” strategy suggests weaker summer months.
This brings us to September… a period on the calendar that most people dread. It’s the market equivalent of going on an annual trip you don’t want to join. It can lighten your wallet and make you crazy very quickly.
The good news? We’re prepared. We have a strategy in place.
It’s the last week of “Summer” for many of us. With our momentum reading negative, the last thing I want to do is start worrying about the equity markets.
There are plenty of reasons why other people are worried about September. China’s economy is under stress. Interest rates in the U.S. are heading higher. Japanese institutions might need to dump U.S. bonds. And there are always “unknown… unknowns.”
As we look out to the next month, I want to conclude with one last chart.
Not only is September a historically bad month for the S&P 500, but it is also a period when volatility tends to pick up.
Stock market volatility tracks the price fluctuations in stocks over a specific period.
Volatility indicates the market’s instability and risk level. So, when volatility picks up, you can assume that there’s lots of concern about the performance of the market itself.
High volatility suggests rapid price changes, often due to economic news, geopolitical events, investor sentiment shifts, and market seasonality.
Volatility last spiked in March, when the market tanked due to a big worry over regional bank collapses and questions about the stability of our financial system. Since then, volatility has slumped, meaning that markets have increased, and stock owners have been happy.
The good news? We’re prepared. We have a strategy in place.
It’s the last week of “Summer” for many of us. With our momentum reading negative, the last thing I want to do is start worrying about the equity markets.
There are plenty of reasons why other people are worried about September. China’s economy is under stress. Interest rates in the U.S. are heading higher. Japanese institutions might need to dump U.S. bonds. And there are always “unknown… unknowns.”
As we look out to the next month, I want to conclude with one last chart.
Not only is September a historically bad month for the S&P 500, but it is also a period when volatility tends to pick up.
Stock market volatility tracks the price fluctuations in stocks over a specific period.
Volatility indicates the market’s instability and risk level. So, when volatility picks up, you can assume that there’s lots of concern about the performance of the market itself.
High volatility suggests rapid price changes, often due to economic news, geopolitical events, investor sentiment shifts, and market seasonality.
Volatility last spiked in March, when the market tanked due to a big worry over regional bank collapses and questions about the stability of our financial system. Since then, volatility has slumped, meaning that markets have increased, and stock owners have been happy.
But look at this chartt. The purple line measures S&P 500 volatility averages over the last 32 years. The blue line is the measurement of volatility this year.
As you can see, seasonal volatility has largely tracked the performance of the last three decades.
And there’s good reason to expect fireworks over the next 35 days.
For now, we’re largely in cash, holding our oil-and-gas stocks, building income-generating positions, and waiting. When momentum is red, we don’t worry.
Now… who’s up for a second crab cake?
Stay positive,
Garrett Baldwin
Secretary of Finance
P.S. From Addison: You can catch this week’s full interview with Garrett right here.
