You would have to be living under a rock not to see the tear the stock markets are on, and especially the construction materials subset of companies that supply aggregates, cement and ready mixed concrete; and that are all breaking through previous records to all-time highs.
And jobs reports continue to be strong, and in a strange dichotomy, the consumer confidence levels are flat to down slightly, yet all reports indicate they are still opening their wallets and spending money very freely.
So over the past three years, as interest rates have climbed as the Fed combated the nasty inflation that arose out of the pandemic stimulus money, there have been all manner of speculation by the Chicken Littles about a “hard landing,” that is, a recession.
Other financial and economic thought leaders who were not pessimistic discussed a “soft landing,” where GDP might shrink against the backdrop of persistently high interest rates, but we would avoid negative GDP numbers and muddle through a flat economy.
Without sounding like a broken record, I said over and over again, from the beginning of the Fed’s assault on inflation, that neither was going to take place. I felt the economy would continue to prosper with good job growth, wage increases and a retreat by inflation to levels we haven’t seen since 2019.
So Guess What? I was right. Essentially, when the Federal Reserve cut short-term rates by a greater-than-expected 50 basis points in September, some concerns were raised that the Fed might see risks the public could not.
Then the jobs report came out a few days later, and beat expectations on the headline payrolls number by over 100,000, stunning the entire Wall Street world. With inflation shrinking and the jobs market remaining surprisingly strong, some economists questioned whether the risk of “no landing” is back on the table.
Economists generally define a “no landing” as an economic scenario where the economy continues to grow while inflation remains high, and the Federal Reserve has limited ability to reduce interest rates. In this scenario, the economy may move into a new economic cycle or extend the current one without a recession.
In speculating on that option, most agree that the upcoming U.S. presidential vote in November has a very uncertain outcome, and that could have an impact on sentiment in the short term. So soft landing optimism still lingers, though it’s now tempered with these fresh no-landing warnings. And of course, there is almost no chance of a hard landing, as that worry seems to have evaporated as stocks surge and employment stays strong.
Bond Yields. Meanwhile, bond yields have surged, with the U.S. Treasury curve leaning toward inversion once again after only recently climbing out of a historic two-year inversion. The bond market’s version of the stock markets’ VIX Volatility Index, or the ICE BofA MOVE Index, just jumped to the highest levels of the year, indicating investor anxiety about market disruptions. Prior instances of a surging MOVE Index have been accompanied by stock market wobbles, which has not occurred so far.
It’s worth remembering that in the summer of 2008, only months before the failure of Lehman Brothers, investors were preparing for Fed hikes after a prolonged easing cycle. In that market episode, the hard landing won out and served as a warning against investor complacency amid falling liquidity.
But currently, liquidity has been surging; a typical liquidity cycle lasts five to six years, with the current cycle only about one-third completed on this timeline. This jives with the fact that the average length of a bull market is about 5.3 years, and we’re only two years in, with a few more to go if history serves as a guide.
Once again, I am going to side with the consumer and the U.S. economy and reconfirm my view of years of prosperity ahead for the aggregates industry, as the tailwinds of the economy continue to drive the stock market to new highs, employment expands, both supporting the prospect for good growth in the near-term.