Duck and Cover?

Corie and I were flipping through the channels the other night and the movie “Twister” was on. Not a great movie, but we know every line of “The Departed,” “The Fugitive,” and “A Few Good Men,” so we left it on. We got to talking about tornadoes which turned into a conversation about tornado drills.

If you are a child of the 80s, you probably remember tornado drills. Before us, there were nuclear war drills, and after us “active shooter” drills. Living in Northwest Ohio in the 80s, we had tornado drills. I frankly don’t recall the exact name of the drill, the Internet references “duck and cover,” but those were more likely a nod to the nuclear attack drills of the 50’s, 60’s, and 70’s.

In my case, we were taught to go to the 1st floor of St. Augustine School, to an interior hallway (no windows), and crouch down with a book over our head. Teachers got graded on how quickly all the kids got to the correct spot and in the correct position. We got so much instruction on what to do that we knew all the rules of hiding from a tornado. Outside? Find a ditch. In a single story home? Get in the bathtub. In a mobile home? Pray.

There was one person who had his own approach. My dad. When we were put on alert by the tornado sirens, we all headed for the basement. Except my dad. He stood out on the front porch and watched. At the time I thought he was crazy. You are going to out run a tornado? Looking back, I realize he wasn’t so crazy. We had a split level home, so seeing it across the field only required 6 steps to safety. Probably a better approach than huddled in the corner of the basement in fear.

In no way do I make light of tornados. When they hit, they create incredible devastation. And the randomness brings an unspoken anxiety. In my 18 years in Napoleon, and now 29 years in Cincinnati, I’ve never been terribly close to one. An F5 hit in Blue Ash/Montgomery in 1999, flipping cars and destroying homes, sometimes leaving one home in a neighborhood flattened while another home in that same neighborhood was untouched. Historically, that’s been the nature of most tornadoes. A lot of fear, drills to prepare, and a few touch down and create targeted destruction.

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Make no mistake, the stock market is also on the move. Up. The S&P 500 is up 10% in 2024 with small and midcaps up 2% and 7% respectively. Dividend paying large cap stocks are somewhere in the middle at 6%. Only the aggregate bond market is down slightly, at -1%.

It’s hard to draw conclusions from any 3 month period, but for the first time in recent memory, technology isn’t leading. Energy, Communication Services, and Financials all returned over 12% in the past 3 months with technology (and other sectors) trailing the broader S&P index at 8.3%.

If everything is humming along, why the tornado drill reference? Each time the market goes up like this, the financial universe on Twitter, CNBC, and just about everywhere else tries to make sense of the rapid rise. And they frequently start raining down charts to justify the next “duck and cover” drill. When is the next storm going to hit? Where is it going to hit? And how severe will it be? 

It’s been fairly common since COVID changed office vacancy patterns to assume a dramatic drop in commercial real estate prices will be the catalyst. But that may be the recency bias created by what we witnessed in 2008 when the housing market imploded, taking the economy with it.

The latest chart to make the rounds is a chart that shows “Interest Payments as % of Disposable Income.” I’ve pasted the chart below and circled spikes in these interest payments. You can see vertical blue lines that signify recession. Generally, a spike in interest payments portends a coming recession. It was most pronounced in 1999 and 2007.

Another indicator that relates to the interest payments is US retail sales which are shown below along with arrows that indicate those sales slumping into a recession.

Maybe the best indicator over time has been the US unemployment rate. You can see from this chart the clear peaks at the end of a recession followed by steep drops until the next recession hits:

What makes this time a challenge is COVID. You can see the giant spike in unemployment followed by the rapid decline. It’s not easy to decipher the role that COVID stimulus played in expanding the growth of the economy and at what point those effects fade. Said another way, are we back to a normal cycle yet?

We continue to watch the economy closely. My opinion based on all the data is that we are still in that “goldilocks” phase - not too hot, and not too cold. But with each move up in the market, and as the indicators add up to show a slowing economy, it may not be long before we finish the tornado drill and have to “duck and cover” for real. Until then, we can continue to play the game Twister, reaching and contorting to find the highest growth parts of the market.

Jared

Brian Kellett, brian@kellettwealth.com. Phone 513-312-6067

Dave Bodnar, david@kellettwealth.com. Phone 513-258-6973

Jared Kline, jared@kellettwealth.com. Phone 513-768-2238

YCharts are put together by me, Jared Kline.

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