As the debt risk grows for the government, and consumer, I'm looking to add short positions in the SPDR S&P 500 ETF Trust (SPY) . Here I'll explain why, and how -- and why I'm not seeing the same rosy economy many others are.
The U.S. gross domestic product grew just a tad over 2% in the first half of this year. But this was accomplished with the Federal government accumulating a deficit for fiscal 2023, which ends at the conclusion of September, of approximately $1.7 trillion. Given the national GDP will be around $26 trillion this year, this deficit amounts to 6.5% of GDP. Clearly this is unsustainable and investors can not count on anything like this sort of taxpayer largess in the future.
Unfortunately, there are few other growth engines to power the economy right now. Industrial production accounts for just over 10% of economic activity in this country. Manufacturing PMI readings have been in contractionary territory for 10-straight months and counting.
Then we have housing, which historically has contributed just over 15% to economic activity. But new home sales continue to be under pressure with the average 30-year mortgage now over 7% and at their highest levels since the beginning of this century. Home prices have held up better than anticipated largely as the result of a lack of inventory. I think average home sale levels will eventually break to the downside, given housing affordability is at all-time lows. Reduced housing activity is already affecting sectors of the economy depending on housing turnover. For example, home furnishing sales were down nearly 8% year-over-year within the August retail sales report Thursday.
Then we have the consumer, which powers just over two-thirds of overall economic activity. Also, the consumer faces considerable headwinds on multiple fronts. The massive amount of excess savings generated over the Covid pandemic via various government handouts, have been burned through now and personal savings levels are falling noticeably. The personal savings rate is now at levels not seen since the Great Financial Crisis. The consumer has taken on debt to maintain spending levels and collective credit card debt and auto loan obligations are at all-time highs. Nearly 40 million Americans will also be negatively impacted as student loan payments resume in October after a three-year taxpayer funded hiatus.
Economic engines domestically are clearly under pressures and American companies can also not depend on overseas growth to bolster earnings. Germany, the largest economy is Europe, is looking at a minor economic contraction in 2023 and China is facing increasing economic issues on myriad fronts.
The market seems more than priced for perfection, given these conditions, especially when risk-free short-term Treasuries are yielding 5.5% and giving investors a compelling alternative for their funds. In addition, forward earnings estimates seem way too high for next year. According to Factset, as of Sept. 8, the current analyst firm consensus is projecting year-over-year earnings growth of 12.2% and revenue growth of 5.6% for the S&P 500 in fiscal 2024. If we get half of that given the current challenges with most key economic engines, I will be surprised.
Therefore, I am adding to my short positions in the SPDR S&P 500 ETF Trust. A decline in the low teens over the next nine months will net me a better than five to one return and will serve as cheap portfolio insurance against my long holdings.
Using the June 2024 $430/$390 strike put pair on SPY execute bear put spreads for a net debit of $7.20 to $7.50 a share. If the SPY drops by 12%, a better than five to one return will be provide. Approximately a 5% decline makes the trade break even.
Positions: Short SPY via long-date out of the money bear put spreads
Notation 1: https://realmoney.thestreet.com/investing/stocks/parsing-through-this-week-s-cpi-ppi-and-retail-sales-reports-16133376