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The Shift from a Rolling Recession to a Rolling Recovery: A Silver Lining for Stock Market Investors?

For the past year, the U.S. economy has been caught up in a so-called ‘rolling recession’, with different sectors taking hits as the Federal Reserve took a bullish stance on interest rates. But as market veteran Ed Yardeni suggests, this rolling recession is morphing into a ‘rolling expansion’ that’s poised to reinvigorate economic recovery and offer some protective cushioning to the stock market.

So, what’s a rolling expansion? In Yardeni’s words, “It’s when the economic sectors that fell into a recession recover.”

A shining beacon of this rolling recovery is May’s robust housing starts data. Considering that the housing sector contributes significantly to the U.S. economy and had been previously bruised by skyrocketing mortgage rates, this upward swing is particularly noteworthy. Yardeni also highlights the National Association of Home Builders/Wells Fargo Housing Market Index which has climbed a steep 77% since December, surpassing the neutral level of 50 for the first time since July 2022. This suggests that the dearth of existing homes is fueling demand for new construction.

But let’s not forget the pivotal role of consumer strength in driving economic recovery. Despite predictions of a consumer spending slowdown as excess savings get depleted, Yardeni remains hopeful. He believes that goods demand will resume its growth later this year, returning to its pre-pandemic uptrend and that consumers will retain enough purchasing power to continue fueling economic growth.

This optimism isn’t unfounded. The Atlanta Fed’s GDP growth estimate for the second quarter currently stands at 1.9%, with the potential for a further uptick if the strong housing data signals a turnaround in residential investment.

Now, it’s not all roses. Persistent weak spots linger in the U.S. economy, particularly in commercial real estate. However, Yardeni believes that these downturns will be counterbalanced by ongoing onshoring trends and fiscal spending. The Atlanta Fed’s GDPNow model echoes this sentiment, predicting a 17.5% growth in nonresidential structures investment in the second quarter due to these factors.

In a nutshell, despite potential technical corrections, Yardeni contends that these solid economic underpinnings should help shield the stock market from major downturns. It seems the rollercoaster ride of the rolling recession is making way for a smoother journey of expansion and growth. Buckle up, investors!