“Housing IS the Business Cycle”

The above is a quote from UCLA economist Ed Leamer.  He wrote a paper in 2007 claiming “residential investment offers by far the best early warning sign of an oncoming recession.”  Shown below is a chart of the cumulative abnormal contribution to GDP growth by residential investment and recessions.

 

When the blue line is moving down, the contributions are less than normal and the economy is headed for a recession (red bar in the graph above).  When the blue line is rising, residential investment is strong and recession risk is remote.
 
Leamer further decomposes the above graph into residential investment the year leading up to a recession and the two year period following the start of recession.  The years shown on the graph below are the year the recession began.
 

 
The graph shows, with few exceptions, that residential investment declines in the year leading up to a recession (top image) and has a “V” shaped recovery sometime during the two years following the start of a recession (bottom image).
 
Leamer’s work only goes through the first quarter of 2007.  We update his analysis with the chart below showing the residential investment picture from 2007 through October, 2016 (most current data available).  If Leamer is right that “housing is the business cycle,” the chart below gives us some confidence the business cycle has a positive trajectory today.
 

 

Residential investment confirms the no-recession outlook we see in the LEI and Yield Curve indicators (shown at the end of this newsletter).  While there appears to be no looming recession, the stock market has lost upward momentum in the past several weeks as tax season and the corporate quiet period (pause in corporate stock buyback programs) is upon us.  Both of these seasonal issues pass next week and our indicators show the long-term bull trend continues.
 
At US Capital Wealth Management, we are seeking to do better than the market.  Our philosophy honed over decades of experience is to avoid major down markets first and then participate in up markets to achieve superior investment returns. We work with clients in navigating the complexities of investing.

We invite you to call or email anytime if you have questions about how we can help you with your wealth management.  Please give us a call at (415) 249-6337 or email us at info@uscapitalwm.com  to learn more.

---

Stock Market Dashboard

---

This commentary and a sampling of previous editions are available as PDFs:

4/13/2017: "Housing IS the Business Cycle"
4/7/2017: Bond Risk Rising with Rates
3/31/2017: Exclusive Stock Market, Higher Stock Price
3/24/2017: Indications of a Positive Stock Market Future
3/17/2017: Hallelujah, Reflation!
3/10/2017: Small Cap Stock Divergence
3/3/2017: Velocity Pivot Good for Stocks
2/24/2017: How Safe Are The Banks
2/17/2017: Climbing A Wall of Worry
2/10/2017: Value Shopper - Europe on Sale
2/3/2017: What, Me Worry
1/27/2017: Extraordinary Earnings Louder Than Trump
1/20/2017: It's Not All About Trump
12/30/2016: Predicting the Future -2017
12/2/2016: Trade What Is, Not What You Think It Should Be – 2017 Outlook

Pursuant to the provisions of Rule 206(4)-1 of the Investment Advisors Act of 1940, we advise all readers to recognize that they should not assume that recommendations made in the future will be profitable or will equal the performance of past recommendations. This publication is not a solicitation to buy or offer to sell any of the securities listed or reviewed herein. The contents of this letter have been compiled from original and published sources believed to be reliable, but are not guaranteed as to accuracy or completeness. Nicholas Atkeson and Andrew Houghton are also principals of US Capital Wealth Management, a registered investment advisor. Clients of US Capital Wealth Management and individuals associated with US Capital Wealth Management may have positions in and may from time to time make purchases or sales of securities mentioned herein.

THIS NEWSLETTER IS PROTECTED BY COPYRIGHT LAW. UNAUTHORIZED DISTRIBUTION AND/OR REPRODUCTION BY PHOTOCOPY OR ANY OTHER MEANS IS STRICTLY PROHIBITED AND PUNISHABLE BY A FINE OF UP TO $25,000.