Observations: 26 September
The Claim: A few cyclical stocks behave as early economic barometers. FedEx has done so consistently in the past and its profit-warning on 21 September is worth taking note. The quarterly update noted ‘constrained labor availability’ impacting margins and ‘continued supply chain disruptions slowing U.S. domestic’ demand compared with earlier forecasts. So far, this is only partially confirmed by other key stocks in the consumer durable segments like autos or in housing.
The intuition: The idea of analysing sector performance as an anticipatory economic tool has been around since at least Dow Theory in the 1920’s. Stanley Druckenmiller of Duquesne explains how he has applied the concept in the past:
"The best economist I know is the inside of the stock market....the cyclical elements of the economy, particularly the front-end cyclicals show a completely different picture than the defensive part of the stock market. So auto stocks are down 30%, they're not down 10% or 11%, their down 30%. Building stocks are down 35%. Banks, which you might think are a symbol of credit are down 25%. The Russell 2000 is down over 20%. Retail equities are down over 20%. So how in the world can the S&P only be down 10 or 11%?...It's because utilities, staples, and pharmaceuticals which are economically defensive are actually up. And this is the same situation I've used cycle after cycle.”
- Stanley Druckenmiller, December 18th 2018, to Bloomberg News
The evidence: By comparing the performance of a select group of “early cyclicals” against an economically insensitive basket of stocks (e.g. consumer staples), we can get an early read on inflection points. FedEx is a pretty reliable indicator historically with a short lead, if any. The performance of Whirlpool (a manufacturer of major appliances) and Trane Technologies (a producer of ventilation systems), which tend to correlate with housing activity, seems to confirm this trend of moderating growth. In contrast, the behavior of auto retailers stocks (e.g. Penske, AutoNation) which often has the best lead-time seems to be re-accelerating. Let’s see.
