Good morning. Nike said yesterday that it expects revenue in this fiscal year, which began this month, to be down mid-single digits. The shares, which had already fallen by almost half from their 2021 peaks, fell another 12 per cent in after-hours trading. Is it me, or are consumer discretionary companies having a rough go of it recently? Email me: [email protected].

Construction

We know what is working in the US stock market: anything within the AI halo. But what isn’t working?

The basic answer to this question is that lots of stuff isn’t. Since the end of March this year, 294 of the stocks in the S&P 500 have delivered a negative total return; 310 of them have suffered price declines. And the declines are all over the place. The 15 companies that have inflicted the largest dollar losses on the index are a remarkably diverse group, spanning just about every sector:

The stock market had a great run, and has become expensive against a backdrop of gently slowing growth. It is not surprising that there has been some retrenching. Looking at all the companies in the index, however, one theme did jump out at me, perhaps because I have been thinking about housing. Almost every stock in the index that has anything to do with construction has had a bad three months. Builders FirstSource, a wholesale supplier to the building trade, is the worst performing stock in the index. Pool Corp, as mentioned yesterday, recently said it will be a very slow summer for pool building. Timber, furnishings, flooring, paint, industrial supplies, toolmakers, DIY retailers, and heavy machinery are all adding to the gloom:

Many of these companies did very well during the pandemic and then corrected some. Now they have corrected again. Several reported soft revenues or weakening margins in the first quarter, though none of the others gave an outlook quite as bad as Pool’s. As a whole, the stock prices tell a worse story than the recent results. But this makes sense: construction is rate sensitive and we have been in a high-rates environment for well over a year. If you are looking for a crack in the US economic facade, construction is a good candidate.

Other macro signals back up the story. Lumber futures prices have fallen 20 per cent since March. Production of construction supplies has been sliding since early 2022. Construction spending is still growing nicely, but it has been slowing since December. Construction employment growth has been steady, but looking at the other data, including from the homebuilding sector, you might wonder how long this will last:

Does this amount to a significant worry? Construction accounts for about 5 per cent of the workforce and 4 per cent of GDP. It is volatile and therefore matters more than that on the margin. It is often discussed as a leading economic indicator, but in this weird cycle it is hard to tell what is leading what. But construction is undoubtedly worth watching.

More on stocks and deficits

Yesterday’s discussion of deficits and stocks attracted a variety of comments but, interestingly, not one that objected to the core thesis: that a more balanced US budget is a major risk to the stock market.

In the comments section on FT.com, Nixer 65 made the point that while Treasury bond issuance is effectively money creation, it matters where the bonds end up — with banks or non-banks:

The issue is when those bonds are not sold into the market and they stay on bank balance sheets . . . I’m going to oversimplify here . . . When the bond is created it has the effect of increasing liquid money (M2). If that bond is then sold in the market it will soak up the equivalent amount of M2 as cash is exchanged for the bond. Hence the overall liquid money supply is (mostly) kept in check. If, however, the bond stays on a bank balance sheet then the money supply is not kept in check

The reason for this, as I understand it, is that when a bond is an asset on a bank balance sheet, it is matched by a deposit liability. Michael Howell of CrossBorder Capital made this point to me a few weeks ago:

Any purchase of a Treasury security by the non-bank private sector ‘funds’ some government spending. [But] a purchase of a Treasury security by a bank often matches a bank deposit. Hence, if the government spends and I get a $1,000 cheque, the bank buys a Treasury with my deposit. But bank deposits, the bank balance sheet and hence money supply have increased, ie, monetisation. [If on the other hand] I get the $1,000 cheque and buy a Treasury there are no money supply nor bank balance sheet implications.

If this picture is right, then what matters in terms of the liquidity created by deficits is bank holdings of Treasuries, which look like this over the past five years:

A further point. Yesterday’s letter talked about how government deficits tend to appear, on the other side of the national ledger, as corporate profits. Jason Thomas of Carlyle argued in a recent newsletter that you can think of government deficit spending in an even simpler way: as the government “credit[ing] private bank account balances more than it debits them”. He then goes on to calculate that the amount the government is pushing into the private sector versus a scenario in which the debt-to-GDP ratio is on a path back to stability after its big pandemic increase. He estimates the excess money that the government is pushing into the economy, versus the sustainable scenario, is about $1.3tn this year. That is 5 per cent of GDP.

One good read

Olivier Blanchard on Macron’s presidency.

FT Unhedged podcast

Can’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.