The Market Is (Incorrectly) Priced For A Soft Landing

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At the end of 2021 I said that inflation would be the theme of 2022. In 2023 everybody will be saying the R word: recession. While inflation has been mostly tamed by the Fed’s aggressive rate hiking, the market hasn’t yet priced in the effects of all those hikes on economic growth. Monetary policy acts with a lag – and that will be the lesson of 2023.

That the economy is contracting rapidly can be seen in the results of companies whose quarter ended at the end of November. Take home builder Lennar (LEN). LEN reported results for the quarter ended November 30 two weeks ago. The key data point was a 15% decline in new orders. As mortgage rates have skyrocketed the housing market has begun to rollover. That will become evident next year.

Next consider used car seller Carmax (KMX). KMX reported results for the quarter ended November 30 last week. The key data point here was a 21% decline in used vehicle revenue comps. Consumers have cut back dramatically on their purchase of used cars. I’m extrapolating that this is being felt in other consumer durables like electronics and home improvement as well. (Hence my small short positions in Best Buy (BBY) and Home Depot (HD) in addition to Lennar (LEN)).

In 2022, everybody was talking about inflation. In 2023, they’ll be talking about recession.

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