The Only Good Economist is the Stock Market

Stan Druckenmiller famously said, “The only good economist I have found is the stock market. People say it has predicted seven out of the last four recessions. That’s still better than any economist I know.”

Would anyone believe you if you told them the S&P was up 10% since last June?

Between conversations on the depth and duration of the looming recession (that’s still happening right?) and general bearishness it feels impossible to believe we’re positive since June.

The Fed didn’t help yesterday. Jerome Powell made it clear he’s not done throwing bricks at the markets head.

Powell’s point was simple: the strength of the economy this year is likely bad news for inflation. Ipso facto, the Fed needs to do more rate hikes than previously planned.

Last month, the market was predicting a 9% chance of a 50bps rate hike at the March meeting. After Powell’s talk yesterday, the market bumped up those chances to 72%.

We live in a world of “Fed heads.” Every time the Fed speaks, the 24-hour news cycle eats it up. (Disclaimer: I’m guilty of this. Their impact on markets over past 18 months has been profound.)

And while the Fed can suffocate markets over short periods, business values ultimately fluctuate on business performance over longer periods. No management team worths its salt is doing long-term planning based on a dot plot.

My first job was caddying at a local golf course. You meet a lot of interesting people in that job. One of my regular loops (went by the nickname Action Jackson) owned a small business in town. He started his business when the prime rate was 16% in the early 1980s.

That’s probably worth repeating, the prime rate was 16%! Yet, we panic whether the Fed Funds rate will be 5% or 5.25% after the March meeting.

Again, I know this stuff matters in the short term. Interest rates act like gravity on valuations, inflation is a serious problem for many, and everything else.

But if Action Jackson can start a business with a prime rate of 16% and keep it afloat (and thriving) four decades later, I’m going to believe the market can sustain itself for a couple more rate hikes.

In fact, the market seems like it’s been looking past much of this.

One possibility: the stock market doesn’t believe the economic forecast is the dire straits others do. There’s a large collection of companies breaking out.

Dick’s Sporting Goods is the most recent example. The stock was up 11% yesterday on earnings and now sits at all-time highs.

An old school retailer at all-time highs …. IN THIS ECONOMY?!?!

Twitter’s Wasteland Capital summarized Dick’s earnings better than I could:

Put simply, certain companies found religion during the pandemic and other companies found excess (cough ***tech** cough).

Look at some of the stocks making 52-week highs:

United Airlines / Booking Holdings / Hyatt Hotels: travel continues unabated.

Wynn Resorts / Las Vegas Sands / MGM: Covid revenge spending not slowing down. Consumers are out having fun.

United Rentals: construction projects in full swing.

PACCAR / TransDigm: truck and airplane manufacturers with full order books.

New highs in travel businesses, casinos, hotels, construction equipment, and manufacturers doesn’t feel bearish.

Obviously, the stock market is not all knowing. Things could go south in a hurry. But markets are funny - when everyone agrees something will happen (i.e the most heavily predicted recession (maybe) ever), it’s not uncommon for the opposite to happen.

No one has privileged access to the future and market forecasts tend to be about as accurate as calling a coin toss. But for the moment, market leadership indicates the market isn’t buying what the economists are selling.