What This Quirky Indicator Is Telling Us About The Economy Right Now…

And the Fed rides to the rescue…

It’s been a while since we’ve said that. If anything, the central bank has been cast in a villainous role this year, crashing the debt-fueled party with the most harsh and restrictive monetary policy in forty years. But recent comments from several regional bank Presidents struck a more dovish tone, suggesting that this rate-tightening campaign may be coming to an end.

Notice how the conversation has changed. The Federal Open Market Committee (FOMC) debate over “how high” to lift rates seems to have run its course, with the general consensus being that 5.50% (a 22-year peak) may be sufficient to corral inflation. Now, the question is “how long” to keep the boot on the neck of the economy before letting up.

Source: Tradingeconomics.com

The data points that inform that decision will likely steer the market in the weeks ahead. They will also go a long way in determining whether or not we have a “soft” or “hard” landing. The jury is still out on that one. For now, the increased likelihood of a pause in future rate hikes has put the market in a good mood, ending a painful recent slump in the Nasdaq.

The “Lipstick” Indicator?

I’ve raised several macro concerns recently, chief among them sagging consumer spending.

And today, I want to tell you another indicator I’m watching closely that’s a little more anecdotal in nature.

Let me explain…

Investors rely on countless different indicators to glean insights into future market swings. Some even reposition their portfolios based on the outcome of the Super Bowl. Proponents of this indicator believe that an AFC victory foreshadows a stock market decline for the year, whereas an NFC win signals a market advance.

The AFC triumphed in Super Bowl LVII this past February, with the Kansas City Chiefs topping the Philadelphia Eagles 38-35. That would suggest a negative return for the Dow Jones Industrial Average in 2023, which looks unlikely at this point. But you can’t rule it out, either. Curiously, this odd indicator has proven accurate 41 of the past 55 years.

I wouldn’t start rooting for a different team just yet, though. You can chalk this one up to a statistical quirk.

But another pattern has been eerily prescient… this one is perhaps more grounded in logic. Have you heard of the “Lipstick Indicator”?

A Clue For Consumer Spending

Decades ago, Leonard Lauder (billionaire chairman of the Estee Lauder cosmetics company and son of the founders) noticed that lipstick sales tended to soar in times of economic stress – thus providing a bearish warning sign.

The thinking goes like this: Whenever families struggle to make ends meet, they cut back on extravagant, big-ticket purchases while rewarding themselves with a few inexpensive trinkets (like lipstick). While not extensively researched, Lauder just might be on to something. There is evidence of lipstick sales surging during tumultuous economic periods, including the 9-11 aftermath.

So, where do things stand now? Well, makeup isn’t exactly a product category I follow too closely. So, I turned to the same resource as everyone else: the Google machine. Front and center was an article from Women’s Wear Daily (the first time I’ve ever utilized this particular publication) showing that lipstick was the fastest-growing product within the cosmetics industry, with spending rising 35% through the first half of 2023.

By itself, you might not put too much stock in that data point. But many other retailers are confirming their own versions of this counter-cyclical indicator. Wholesale club Costco (Nasdaq: COST), for example, is seeing more shoppers switch from beef to pork, a cheaper alternative.

Nationwide, a new report from the Federal Reserve finds that two-thirds of American households are trading down to less expensive versions of everyday products. That’s bad news for big discretionary categories, like furniture and boats.

Closing Thoughts

Let me add another indicator to the list… one that gets directly to the point.

The S&P 500 currently has an earnings yield of just 4.6%. Comparing that to a risk-free 3-month Treasury Bill yield of 5.5% leaves a negative differential of 90 basis points. According to Bank of America, that’s the widest such gap since 2000 – if you’ll recall, a painful time for investors.

I don’t think this trend has run its course just yet, so it may make sense to put a couple protective stop losses in place to nail down gains.

With the odds of a correction growing, I see no reason to change my defensive posture. But ultimately, these market gyrations always unearth value.

We will certainly revisit this topic in the near future.

In the meantime, we’re finding plenty of high-yielding securities with lots of upside over at High-Yield Investing.

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