You are the Economy (well, 71%)

by | Apr 28, 2023 | Podcasts

You Are The Economy

71% of the US Economy is you – the consumer.   Did you know that?   And the US consumer has provided a backbone to this economy stronger than anyone has ever predicted.  We sure DO know how to spend money!   Never forget, you ARE the economy!

In Episode #440 of the Mullooly Asset podcast, Tim and Tom discuss how resilient the market has been, how resilient the US consumer has also been, and how 71% of the US economy is based in (or around) consumer spending.   people may whine and complain, but the articles we reference in this podcast point to the how many “hits” we can absorb, and the overwhelming negativity and pessimism found on Wall Street lately.  Yet, things continue to improve.

We cover a wonderful post from Michael Batnick, of Ritholtz Wealth, asking “How Much Can We take?”   Michael writes about a looming credit contraction, the hits the market (and the economy) have been taking and still hanging in there.

We also discuss two excellent posts from Ryan Detrick, the market strategist from Carson Wealth.  Detrick points out, over and over all the examples and recent situations where the news was bad, yet the market continues to make progress.  By the way, we feel Ryan is a great follow on Twitter!

Markets can — and do — fall quickly.  But they often get the pain out of the way, regroup and move ahead.  One of the primary reasons is because we continue to spend money – you ARE the economy.

24 minutes of heart-skipping dialogue awaits!

Timestamps for You Are The Economy
0:33 – Post from Michael Batnick – “How Much Can We Take?”
3:30 – “Looming credit contraction” – possibly?
5:10 – “Feels bad.  But… the market seems OK.”
5:50 – 71% of US Gross Domestic Product (GDP) is the US consumer
9:48 – How will markets react?  A possibly different result.
11:55 – Trying to predict – is anyone bullish anymore?
14:29 – Markets can fall fast.  But what’s happened since mid-year 2022?
17:30 – Thanks Elaine.  It’s been “popular” to be negative.

Links for “You Are The Economy
Michael Batnick: “How Much Can We Take?” 
Ryan Detrick (part II): Is Anyone Bullish?
Ryan Detrick (part I): Is Anyone Bullish? (December 2022)  

Still Waiting for the Recession    
Bureau of Labor and Statistics Report on Consumer Spending 

Thanks for listening to podcast episode #440, and be sure to subscribe to the Mullooly Asset Management podcast wherever you tune in to your favorite shows.  You can also find all of our previous Mullooly Asset Management podcasts here.

Transcript for You Are the Economy

Welcome back to the Mullooly Asset Podcast. This is episode number 440.
This is Tim Mullooly. With me today is Tom Mullooly. Tom, how’s it going?

It’s going well. Aaron Rodgers is on the Jets.

Yes. He’s being introduced probably by the time this podcast is over in the next half hour.
Wow.
So exciting times for Jets fans.

We have a couple things that we want to talk about today – a few articles that we’ll link to in the show notes.

The first one that we wanted to talk about, is called “How Much Can We Take?”
It’s from Michael Batnick from Ritholtz Wealth Management.

You’re gonna do something a little unusual.

Yes. So I was reading the post this morning, and the first couple paragraphs, were so succinct and to the point that
I thought we need to talk about this on the podcast. And I honestly think I’m just going to read this verbatim, just the first couple paragraphs, because he summed up exactly what has happened.

So many things had happened to the market and the economy over the last couple years. Uh, pretty much asking how much can we all take?

And then there are some other points that we want to build off of once we recap everything that has happened.
So this next portion here is just the first couple paragraphs.
It’ll only take a minute. So bear with me.

Our compliments to Michael Batnick. We are not the author of this next section here.

He writes: “The economy has been through a lot over the past couple of years.

We turned it off and we turned it back on again. Like we were restarting a video game.

A combination of fiscal stimulus and supply chain disruptions led to an inflationary spike not seen in over four decades.

All the containers stuck in the ports of Los Angeles wreaked havoc on many consumer facing companies.
Semiconductors were in short supply, used car prices went through the roof.

Amidst all the chaos, Russia invaded Ukraine sent energy and commodity prices vertical. To slow all this down, the Federal Reserve undertook a historic increase in interest rates, basically straight up for the last year, and counting, that caused the housing market, at least the existing one, to all but freeze over.

It also caused several financial institutions to mismanage their interest rate risk, and led to some of the biggest bank runs this country has ever seen. Rising interest rates dis destroyed any appetite for risk taking.

With tech being at the epicenter of the enthusiasm, unwind, venture funding dried up, IPOs ground to a halt, and even mega mega cap tech companies were forced to do massive layoffs along the way. The S&P 500 fell 25%, and the NASDAQ 100 lost more
than a third of its value.

The $3 trillion office real estate market is going to experience some pain over the next few years with occupancies down and borrowing costs up.

And the cherry on top of this “disgusting sundae” is the looming contraction in credit. How much can we take?”

And that’s the end of the excerpt.
There’s more in the post that Michael wrote, there is more. And

And we’ll link to it in the show notes so you can read the whole post.

It’s very, very good. And like you said, it very succinctly captures what has happened over the last three years to get us to this point.

Interesting that we’re starting to see headlines now talking about the looming credit contraction.
We don’t know, right?

We don’t know if that’s gonna happen. Yes.

A couple of those things are projections into the future may or may not happen.

The $3 trillion Office real estate market.

That’s an opinion. It seems like it’s trending in that direction, though more and more people are still working at home and people are not coming back to the office in full force.

So the only, the only issue I have with that is, and again, this is a minor point, is that in doing a lot of research and digging through the archives, I’ve found that we have been looking for a contraction in office/corporate real estate, going back to when the Japanese bought Rockefeller Center in 1987.

And so for 30 years plus now we’ve been hearing that the corporate real estate market, the office and strip malls
and, shopping malls, and this is all overbuilt and we need to have some day of reckoning. It hasn’t happened yet. Maybe this will be the trigger.

Maybe Covid and people working from home will be the ultimate tipping point.

For this market so far kind of worked out.

Yeah. I think all of that to say everything that Michael laid out, you look at all of those headlines and everything that’s happened, you probably think we are in the pit of despair right now. And, you know, everyone is down in the dumps.

And while the sentiment for some people might feel that way, the market is actually off to a pretty good start this year.

The economy is being stubbornly strong to the point, where some people are rooting for it to weaken a little bit. But, you know, we’ve kind of withstood all of this.

Everything that’s gotten thrown at us and the state of affairs currently is we’re not in that bad of shape.

So there’s a statistic that kind of bubbles up to the surface at least four times a year when we get the gross domestic product report – the GDP. And that number typically is somewhere around the low seventies,

Something like 71% of gross domestic product in the United States is driven by the consumer.

If the consumer ever gets tapped out, we’re in trouble.

And that, amazingly, has been extremely accurate for my entire career.
When the consumer got tapped out in 2008, 2009, and even going into 2010, we had some bumpy paths. Yeah.
It’s interesting how no one could get a loan to buy a car in 2009, and people had trouble getting mortgages in 2010 and even into 2011. But the market had already turned the corner in March of 2009 and started moving up.

The market tends to anticipate what the next six to 12 months are going to look like. I heard someone on Bloomberg
this morning saying, we may be in a recession right now.

We won’t know that for a few more months or even a couple of quarters, but the market tends to look ahead. And so when you see, Batnick had these numbers – the S&P fell 25%, and the Nasdaq lost more than a third, that is anticipating some kind of slowdown.

Now, it may be a slowdown in economic activity. It may be a slowdown in earnings. Or both.
No one knows at the time. I’m gonna tie in his partner, Josh Brown, who has said many, many times: you could have, you could know the news — what tomorrow’s news is gonna look like. What you DON’T know is how the market
is going to react to that news.

I mean, look, you and I sat across from each other three years ago. And we heard the pitch. It’s gonna be, we’re going to basically shut down the economy, for 15 days, to flatten the curve.

Right.

You know, that turned into two and a half years of trying to explain away covid. Yeah.

We don’t, we don’t really know what’s coming.
And I feel like sometimes when the market drops, when things get get rough, people get so beaten down and so pessimistic and negative in their mindset that when things start to turn around — they don’t believe it!

And you’ve said that before in the past, in 2009, when the market bottomed, things started going back up. And people were like, this can’t be real, this can’t be real. And by the time everyone came around on it and be like, oh wait,
this, I think this is actually real, they missed out on a huge move in the market.

And you know, we tell people all the time, yes, the accounts might be down year to date, or over x amount of time, but the only way to make that money back is to remain invested.

If you try and jump out at any way along the bottom and don’t absolutely nail the bottom, you’re gonna, you’re gonna miss out on some of that recovery.

And it’s really, really hard to nail the bottom because bottoms happen when headlines like, what we’re seeing now are,
are happening.

These negative headlines, everything that Michael outlined in the first couple paragraphs that I’ve just read, those things are still coming out.

There’s a couple things. The looming credit contract, you know, everything that he said might happen in the future, I mean, doesn’t necessarily mean that the market is gonna drop again because of it.

So there are things that happen along the way. I think that, people just have to remain, open to the idea that the market can
recover while the news is still bad.

Even though we might know what tomorrow’s headlines are gonna be, we still don’t know how the market’s gonna react. And yes, that was a lot of bad news and the market took some hits. But it seems to have been hanging in there.

But there have also been times where we thought, Hey, this is probably the bottom. And it wasn’t.
Right.
To be fair, you know, we want to talk about both sides.

We had Lehman file for bankruptcy – it was September 15th, 2008, within a week of that date, before and after we saw
Fannie Mae and Freddie Mac get bailed out.

Then Lehman went under and everybody kind of thought like, okay, it can’t get any worse than this.
The following four days later, they had to do a bailout of AIG! Which, by the way, at the time was a member of the Dow
Jones Industrial average.

Right.

Which is pretty remarkable. Uh, that was all in September of 2008. And the market continued to sell off. Uh, but you know, November and December things actually started to level off and actually go up a little bit.
So folks started to think, Hey,

“Maybe the worst is over. Right?”
Maybe we’re gonna find our way out of this. Yeah.

No, no. In January and February, the market went down another 25% right before the S&P bottomed at 666 on March 9th, 2009. So again, you don’t know, and we saw plenty of people who said through all of 2009, as the
market went straight back up that, oh, “this is a suckers rally.” “It’s a head fake, don’t believe it.”

And by the time people finally started believing that it was a rally, that it was real, it was the end of 2010, a year and a half later! And in 2011, the market laid an egg. Yeah. It did nothing.

Yeah. I think it’s less of an endorsement of where we think the market is going right now or in the immediate future, and more of a reason to just stop trying to guess where the market is going in general. Because we don’t know. Typically, in the past when people get, as a whole extremely bearish, there it tends to be a, you know, sometimes a contrarian indicator
and you can only get so bearish before things turn bullish again.

And, you know, that kind of leads us into the second article that we had, which was from Ryan Detrick.
He posts some really great stuff for Carson Group, and he’s got stuff on Twitter as well.

If you are on Twitter, dear listener, follow Ryan Detrick. D e t r i c k.
He’s an excellent follow on Twitter.

Yeah. And, so this morning he published an article, that was titled, “Is Anyone Bullish Part Two?”

He had written part one back in December, I believe, of last year. And pretty much he was talking about, similar to Michael Batnick, how, you know, all of the headlines and everything and people’s sentiment are so unbelievably negative right now. That is, actually, a bullish case for the market. And, you know, the market has been performing
well so far in 2023, especially relative to last year.

Why are people still so bearish even after the market has been doing well?
And the economy has been doing well too?

It’s weird when people think that the economy doing well is a bad thing.

Right. I just want to set the record straight because oftentimes we’ll sit here in the conference room with someone who’s
coming in to meet us for the first time, and they’ll say something like, “2022 was so bad for the markets.”

And every once in a while when I’m feeling “randy,” I’ll be like, “oh, is that so? Why?”

Like, please explain to yourself. Tell me why.

And we’ll hear, “oh, well, I lost 20% in my 401K last year!”

And I don’t want to sound like the old school teacher who’s trying to reprimand and correct everybody. But if you look at your statements, you’ll see that from the market hit a high for the year on January 3rd, the first business day of the year.

And the market went pretty much straight down for six months.

And if you look at where the market was on July 1st, 2022 and the end of the year, the market basically did nothing.

It was treading water and we’re up from there. Depending on which day and where you want to draw the lines, uh, you know, we’re up 6% or 8% from Thanksgiving, and we’re recording this in late April. Yeah.

So about six months, market’s been recovering and we’ve been up higher than we have been now.
So we had a bad six months. And that six months was a year ago.
And we’ve basically been treading water ever since.

But there’s two points to take outta that. Number one, it wasn’t a totally bad year. We had all the bad news up front. So the other part of this is, and I think folks really lose sight of this point, is that the market can fall fast.

I mean, what Batnick, you know, the numbers that Batnick was talking about where the S&P lost 25% and the Nasdaq lost 33%. That happened in six months. Right. It happened very quickly.

Yeah. And the market’s basically been flattened. The flatlining since then.

The good thing for everybody out there is most people didn’t have “just 2022” to invest and now they can’t invest anymore for the rest of their lives. And “what happened before 2022 didn’t exist… the only period that you had to invest money was 2022 from January to December,” then yeah, it was probably pretty bad for you.

But what happened before 2022 and what’s gonna happen after in 2023 and beyond. In a vacuum, those 12 months or six months even, were not great. But the good thing is we have time to make it back.

And you had made money along the way leading up to this. So it market downturns. You gotta put it into context.

Cuz sometimes the market gets it too far ahead of itself, leading into 2022.

That’s all we heard was that, oh, we’re due for a pullback. We’re due for a pullback. These valuations are too high, you know, the market needs to come down everything. We need to take a little bit of a breather.

And then the market took a breather for six months and everyone lost their mind.

So <laugh> like, sometimes you just throw your hands up. It’s like, what do, what do people want? I don’t understand. Yeah.

We finally got what we wanted.

Yeah. Same thing with kind of, with Detrick’s point in his post, it’s, you know, markets off to a pretty good start this year. The economy is holding up pretty well and people are as bearish as they’ve ever been.

Yeah. Why.

<Laugh>? Um, I think it’s, it’s popular to be negative.

I agree with that.

I also think that, you know, I forget if it was a, a podcast or a video, but, recently I brought up the name Elaine Garzarelli. She got her 15 minutes of fame.

And Elaine, if you’re listening, I’m sorry.

But, her claim to fame in the eighties was, about a week before the crash, she was on one of these financial TV shows and said, “I think we’re setting ourselves up for a big crash in the market, maybe as much as 20%.” And you know, then we got 22% in one day.

And so, you know, Shearson Lehman, being, you know, the ultimate op opportunists, they jumped on that and created a huge fund where they raised a lot of money for that.

But I think there’s still that thought in the back of everyone who goes on financial media. hether it’s online or on tv, where it’s like, “I wanna be out in front saying this market could go down.”

Because then they can point back and say, “see that guy from XYZ firm, he called it.”

And so now everybody is bearish.

They’re not gonna have you on TV to give the real answer, which is, “I don’t know!”
You’re not gonna get asked back if that’s what you say. So you gotta have an outrageous take one way or the other.

It happens in the financial media. You see it all over ESPN, politics, sports, entertainment, financial media. You gotta have a hot take, otherwise you’re not getting asked back.

Oftentimes, you know, they don’t judge you by the nine losing opinions, but they keep hold onto that one winner. If you’re making 10 calls, one of them’s gotta be right.

Look at the guy from the big short, right, Michael Berry.

Cassandra.

I see articles on MarketWatch said, oh, Michael Burry says this, he says this again. And how many times has he been wrong
since the one time that he was very, very right?

He was very right once, yeah. He’s been wrong often.

Beyond that, coincidentally, this chart that I’m gonna hold up — so everybody listening to the podcast can see this!
But we have this chart that Ryan Detrick shared.

Every single one of these Wall Street firms is calling for a lower target on the S&P 500 than where we are right now.
Every single one of these firms 12 months ago had a higher target than where we were at the time.
Right.

So this is the ultimate, in my opinion, the ultimate contra indicator, right?

If everybody on Wall Street is saying the market’s going lower: that’s a buy signal.

It’s like, when we talk about year-end price targets. How many firms every year is just like more of the same, more of the same. You know, you don’t wanna be the one firm that sticks out and says, we think things are actually gonna turn around this year.

Part of the reason why we follow a guy like Ryan Detrick.

Ryan tends to be optimistic in nature with what he’s looking at. And I mean, the numbers are the numbers.

It’s not like he’s, he’s making things up.

These are all very accurate charts and graphs and numbers and things that point towards, you know, the positives that are out there in the market because there are quite a few, despite what you see, uh, from people and I’m looking at this chart as well, and it also is just very telling, you know, the way that they conduct some of these surveys too, they, have you ever seen when, you know, they give you certain options to choose from and, and everyone kind of picks the option towards the middle – because no one wants to be on one end or the other.

The chart that we’re looking at is almost, it’s a pretty good bell curve in terms of, it is.
You know, the options on the end are not highly picked and the options in the middle are the most, most selected.

So it’s just a lot of people saying to me that says, I don’t know, and I’m gonna choose somewhere in the middle because I have to choose something and I don’t want to be incredibly incredibly wrong one way or the other.

So, uh, almost 55% of those surveyed expect the S&P 500 at the end of 2023 to be at 3,500. So more than half. Another 13% think that the S&P 500 will be below 3500. 26% say it’ll be somewhere between 3000 and 3500. So there is, uh, 90%.

Yeah, more than that. More than 90%.
Are people saying it’s going to be below 3,500 or up to 4,000?

There is a half of 1%. Just one half of 1% who expect the S&P 500 will be above 4,500 at the end of the year.

I think all of this to say that, these people answering these surveys are professionals that do this for a living and, you know, even they get it wrong and people tend to just pile into one camp or the other, whether it’s super bullish or super bearish.

And a lot of times, you know, when it, when it’s bearish like we’ve outlined, the market can be going up while
headlines and people’s sentiment and what people think are going the opposite direction.

So I wouldn’t necessarily just read the headlines and look at polls and sentiment surveys of what people are feeling and actually take a look at the numbers of what the market is actually doing. Sometimes you might be pleasantly surprised.

I think that’s gonna wrap up episode 440 of the Mullooly Asset Podcast.
Thanks for listening and we’ll see you on the next episode.

Tom Mullooly is an investment advisor representative with Mullooly Asset Management.

All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management.

This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

Clients of Mullooly Asset Management may maintain positions in securities discussed in this podcast.

 

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