Hard landing or soft landing? It’s one of the most important debates in the market right now, as the answer to that question likely determines whether the next 10% in stocks is higher or lower.
Yet, despite the importance of this issue, I haven’t seen any sort of comprehensive “scoreboard” on which outcome is more likely. And so, when something that you need doesn’t exist, it’s incumbent upon you to create it.
That is, in fact, what we have done, and by “we” I am referring here to myself and my “secret market insider,” i.e., my superb and anonymous Wall Street colleague that feeds me the information used in our daily market briefing, Eagle Eye Opener.
This scoreboard will help us keep track of the key data points that will dictate whether we get a hard economic landing (bearish for stocks) or a soft economic landing (bullish for stocks).
Now, we wanted to keep this scorecard succinct, because as Shakespeare so nicely put it, “brevity is the soul of wit.” That’s why we aren’t going to list every possible data point in our scoreboard. Instead, we’ve included the “Big Three” data points from each month (job adds, ISM Manufacturing PMI and ISM Services PMI), along with a measure of consumer spending, a measure of business spending and the timeliest measure of unemployment (because that will deteriorate before the monthly jobs report).
To help determine if the scoreboard is pointing more towards a hard or soft landing, we decided to compare the most-recent data to the readings one month ago and three months ago. The reason for that is simple: Hard landings don’t happen gradually, they happen suddenly. Soft landings do happen gradually.
So, comparing activity to a year ago isn’t helpful in determining if we’re getting a hard landing. Activity can be down over a year ago, but those declines don’t automatically mean a hard landing. Conversely, if activity is off sharply from three months ago (or a month ago), that does imply something has changed and the economy is quickly losing momentum (a hard landing).
Given this analysis, the conclusion is remarkably clear: If we look at the scoreboard, a soft landing is currently more likely than a hard landing. Here’s why.
Of the “Big Three” monthly economic reports, only one is flashing hard landing. Of the three most-important monthly economic reports, only one, the ISM Manufacturing PMI, is pointing towards a hard landing. The PMI is solidly in contraction territory (below 50) and down from one and three months ago. Conversely, the ISM Services PMI is down moderately from one month and three months ago, but it’s not yet in contraction territory. So, those declines are signaling a soft landing more than a hard landing (at least for now).
The monthly jobs data is down from previous very high levels, but job adds are still above 200,000 and that’s not a number that implies hard landing. Bottom line, two of the big three economic reports are signaling soft landing. What signals hard landing going forward? ISM Manufacturing PMI declining further, ISM Services PMI dropping below 50 in the next month or two and job adds dropping below 150k starting next month.
Signs that U.S. consumer spending is materially slowing. Retail sales, which is the most comprehensive measure of consumer spending each month, are higher than they were three months ago, and while off recent highs, it’s not giving the type of signal that would imply a hard landing is upon us. But even beyond the macroeconomic data, earnings commentary does not imply we are seeing a material collapse of consumer spending. Now, this shouldn’t be a shock, because consumer spending only substantially slows when unemployment rises, and that’s not happened yet. Bottom line is consumer spending may be slowing, but it’s not imploding like we would expect in a hard landing (at least not yet). What signals a hard landing? Retail sales roll over and begin to drop sharply, falling to multi-month lows within the next three months.
Business spending slowing, but not collapsing. New orders for non-defense capital goods excluding aircraft (NDCGXA), i.e., durable goods, is the best metric we have for national business spending and investment, and it’s essentially little changed from one month and three months ago. That’s largely backed up by earnings commentary so far. Yes, tech companies have warned on business tech spending, but we have to think about that in the context of the massive growth of the past few years. Beyond tech-related concerns, however, there’s not a lot of evidence to imply business spending is falling off a cliff. What signals a hard landing? NDCGXA falling to multi-month lows in the next three months.
Employment is deteriorating, but barely. Employment is a lagging economic indicator, broadly speaking, which means it only deteriorates after the economy has slowed materially. But jobless claims is one of the most current employment indicators. So far, there’s been a mild increase in weekly claims as they are up over a one-month and three-month time frame, but the increase isn’t enough to imply a hard landing.
What signals a hard landing?
Claims moving above 300,00 within six weeks.
To be clear, today’s analysis does not mean a hard landing won’t happen. The huge Covid fiscal stimulus likely could delay any economic slowdown far longer than investors (or analysts) think possible. So, do not take this analysis as us saying a hard landing won’t happen — we think a hard landing is still entirely possible in the coming months or quarters. However, so far, it is not happening.
Yes, the economy is clearly slowing, but not at the pace yet that we’d consider a hard landing. And that’s one of the reasons stocks have proven resilient. Going forward, this hard landing/soft landing debate will continue and remain critically important for the next material move in stocks, so we are going to keep updating this scoreboard for you, so that you can adjust your portfolio, protect against volatility or seize opportunities.
And, if you’d like this kind of analysis delivered to your inbox every trading day before the market opens — and for about the cost of your morning cup of coffee — I invite you to check out my Eagle Eye Opener today!
Your Mind is Not for Rent
No, his mind is not for rent
To any god or government
Always hopeful, yet discontent
He knows changes aren’t permanent
But change is…
–RUSH, “Tom Sawyer”
Sitting at a piano bar in Las Vegas is the last place I expected to hear a good rendition of “Tom Sawyer” by the greatest rock band ever (yeah, I said it), RUSH. Yet, that’s what happened Monday night at the Paris Hotel, as I am here this week for the MoneyShow. Interestingly, the lyrics of the band’s masterpiece (one of many masterpieces) got me to thinking about the prevalence of what I call “uncritical tribalism” in our world.
Today, much more so than any time I can remember, we are completely polarized between left and right, between “woke” and “MAGA”, between “Second Amendment rights” and gun control, between individualism/capitalism and collectivism/socialism… the list of issues goes on and on. And while all these issues are important, the one thing I encourage you to do is come to your own, well-thought-out, independent ideas.
Try to avoid giving your mind up for “rent” to any demagogue claiming to have the easy answers to tough and complex problems. Think for yourself. More happiness, truth, beauty and wisdom will come to you that way.
Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.
P.S. Come join me and my Eagle colleagues on an incredible cruise! We set sail on Dec. 4 for 16 days, embarking on a memorable journey that combines fascinating history, vibrant culture and picturesque scenery. Enjoy seminars on the days we are cruising from one destination to another, as well as dinners with members of the Eagle team. Just some of the places we’ll visit are Mexico, Belize, Panama, Ecuador and more! Click here now for all the details.
In the name of the best within us,