Construction may be the weakest link
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.