Yesterday, the Census Bureau released its preliminary monthly U.S. Building Permits data. This indicator measures the change in the number of new building permits issued by the government and is a key economic metric. Why? Because building permits offers early signals about future construction activity, economic confidence, and broader economic trends. The issuance of building permits precedes actual construction work, influencing various economic sectors and contributing to GDP growth. By tracking building permits, economists, policymakers, and investors gain valuable insights into the future direction of the economy.
Given the importance of building permits as a predictor of economic and market trends, they are closely watched by equity and fixed income traders. When looking at the data, it’s essential to think about it in two ways: where it stands compared to its historical average and where it is heading. By isolating these two parameters, one can often uncover vital clues about market direction.
The latest release showed that building permits are both below their historical average and trending lower. What does this mean from an investment standpoint? When building permits trend higher, bonds tend to underperform while stocks outperform. Conversely, when permits trend lower, bonds show strength and equities exhibit relative weakness. This makes sense, right? If building permits are a leading indicator of the economy, it’s no surprise that improving conditions signal a more risk-on environment compared to deteriorating conditions.
While a single economic release doesn’t constitute a trading strategy, it can help shape investment policy. Building permits have been trending lower since the beginning of 2022, marking the cycle high since the Great Financial Crisis. This technically indicates an environment more favorable to fixed income relative to equities, however the stock market is sitting near all-time highs. This highlights the importance of not relying on one single indicator. Does this mean a bear market is imminent? No, but it also shows that recent market dynamics were not necessarily in-line with historical precedent. Understanding where we are headed can help us prepare our allocation today.
Stay informed and make data-driven investment decisions!
