📰 Sunday Edition 44: Housing Starts, Core CPI, and Sports Gambling

👋 Hey, Mike here! Welcome to ✨ Sunday Edition 44 ✨ Each week I dive into the markets, the economy, and investing.

Quote of the week

"Hesitation Creates Gaps, Boldness Obliterates Them."

Robert Greene, The 48 Laws of Power

Markets

S&P 500 is up 4.0% this week alone, largely recovering from last week's fiasco:

Last week more than a few notable "experts" called for emergency rate cuts due to the rapid market decline which has now almost completely been reversed.

Always remember to zoom out when the everyone seems to lose their minds. From the above chart we see that last week was nothing to worry about.

Sectors

As expected, volatile sectors which lost the most last week also gained the most this week. Consumer discretionary and information technology take the lead with 4.8 and 6.9 percent gained respectively. The S&P 500 is at a whopping 13.8% 5-year CAGR.

Economy

Inflation

Core CPI is showing a significant downward trend, indicating a cooling of inflation pressures. This is positive economic news, as the graph illustrates a sharp decline from the peak levels seen in 2022. The current trajectory suggests a gradual return towards the more stable inflation rates observed in the years prior to 2020, which is encouraging for economic stability and policy makers.

Housing

Housing starts are exhibiting a downward trend. The housing market is experiencing a significant slowdown, primarily due to a combination of factors:

1. Inflationary pressures
2. Elevated interest rates
3. Demographic shifts

A large segment of homeowners find themselves in a "rate lock" situation, reluctant to sell their current homes financed at historically low interest rates. This reluctance to move is contributing to reduced market activity and new construction.

The graph of New Privately-Owned Housing Units Started clearly illustrates this trend. After reaching a peak in early 2022 of over 1.8 million units, there has been a notable decline. The most recent data points show housing starts hovering around 1.3 million units, representing a significant drop from the recent highs.

This decline in housing starts reflects broader economic challenges and changing dynamics in the real estate market, potentially impacting housing affordability and availability for prospective buyers.

Internet Finds

It turns out that sports betting is detrimental to vulnerable households. Link to the full paper: Gambling Away Stability: Sports Betting's Impact on Vulnerable Households by Scott R. Baker, Justin Balthrop, Mark J. Johnson, Jason D. Kotter, Kevin Pisciotta :: SSRN

From the abstract (emphasis my own):

"We estimate the causal effect of online sports betting on households’ investment, spending, and debt management decisions. Employing household-level transaction data and a staggered difference-in-differences framework, we find sharp increases in sports betting following legalization. This increase does not displace other gambling activity or consumption but significantly reduces households’ savings allocations, as negative expected value risky bets crowd out positive expected value investments. These effects concentrate among financially constrained households, who become further constrained as credit card debt increases, available credit decreases, and overdraft frequency rises. My findings highlight the potential adverse effects of online sports betting on vulnerable households."

Here we have deposits/income. This graph shows sports betting hits low-income households significantly harder than any other group:

Portfolio

As we approach the end of the quarter, the S&P 500 has demonstrated impressive growth, delivering a YTD return of 17.5%. This reflects the resilience and strength of the broader market, driven by a combination of robust corporate earnings, economic recovery, and investor sentiment.

However, it's important to recognize that the portfolio has its own unique strengths. Despite a slight dip of -0.4% in the current quarter, the portfolio has still managed a respectable YTD return of 9.7%. Over the past year, the portfolio has delivered a solid 27.2% return, closely trailing the S&P 500's 29.0% return.

Where the portfolio truly shines is in its performance since inception. Since the portfolio's inception on April 18, 2022, it has outperformed the S&P 500, with a cumulative return of 52.2% compared to the S&P 500's 31.3%. This translates into an annualized return of 22.4% for the portfolio, significantly higher than the S&P 500's annualized return of 13.4%.

This performance underscores the strategy of disciplined investing, focused on long-term growth while managing risk effectively. This approach continues to demonstrate its value, even in a challenging and dynamic market environment.

Here is a table of my portfolio, sorted by weight: