The Observatory

Weaker Mortgage Apps -> Weaker Residential Spending

Welcome to The Observatory. The Observatory is how we at Prometheus monitor the evolution of the economy and financial markets in real-time. The insights provided here are slivers of our research process that are integrated algorithmically into our systems to create rules-based portfolios.

We’ll keep this exceedingly brief today due to time constraints. We received new data in the form of MBA mortgage application data today. This data slowed on a sequential basis from last week and also compared to last month. This weakness in mortgage application data suggests sustained pressure on residential GDP, which we show below:

This data, along with others, continues to point to a weakness in broader investment in GDP. Below, we show our estimates of residential investment in GDP:

Which feeds into our broader take on real investment:

Overall, while some housing data has shown improvement, we think the trend remains clear, i.e., we remain in a cyclical downturn. Using this information and a wide range of economic data, we can estimate when the economy is likely to enter a recession in order to side-step bear markets. The constellation of data we track suggest risk are high and, at minimum, warrant moving to cash versus assets. simple strategy in these environments is to simply exit equity markets, which are most exposed to recession. As always, we’ve systematically formulated our logic— allowing us to create investment strategies. Below we show a simple strategy we shared yesterday, which switches out of stocks and into cash when conditions warrant us to do so:

Data continues to point to a slowdown in activity, and we think it prudent to manage risk accordingly. Until next time.