{"id":4664,"date":"2023-06-01T15:09:05","date_gmt":"2023-06-01T15:09:05","guid":{"rendered":"https:\/\/mmm.9dotdigital.ca\/?p=4664"},"modified":"2025-03-27T15:50:39","modified_gmt":"2025-03-27T15:50:39","slug":"navigating-a-coming-turn-in-the-stockbuilding-cycle","status":"publish","type":"post","link":"https:\/\/mmm.9dotdigital.ca\/?p=4664","title":{"rendered":"Navigating a coming turn in the stockbuilding cycle"},"content":{"rendered":"

The stockbuilding cycle is on course to bottom soon and upturns have historically been associated with a procyclical shift in market behaviour. Several considerations, however, argue for caution about positioning for such a shift now. <\/p>\n

The key indicator used to monitor the cycle here is the annual change in G7 stockbuilding expressed as a percentage of GDP, shown in chart 1. Lows were reached every 3 1\/3 years on average, which matches the 40-month periodicity reported by the “discoverer” of the cycle, Joseph Kitchin, in 1923. <\/p>\n

Chart 1<\/strong><\/p>\n

\"\"<\/span><\/span><\/p>\n

The stockbuilding cycle is a key driver of industrial fluctuations: the correlation coefficient of the above series and contemporaneous G7 annual industrial output growth over 1965-2019 was 0.75.<\/p>\n

The last cycle low was in Q2 2020 so the next could occur in H2 2023, based on the average cycle length. Partial Q1 information – an estimate is included in chart 1 – indicates that the downswing is well advanced, consistent with the cycle entering a window for a low. <\/p>\n

Cycle lows often mark a change in the market environment from risk-off \/ defensive to risk-on \/ cyclical, e.g. the price relative of cyclical equity market sectors versus defensive sectors has bottomed around the same time as the cycle historically – chart 2. <\/p>\n

Chart 2<\/strong><\/p>\n

\"\"<\/span><\/span><\/p>\n

So should investors start adding cyclical exposure? There are several reasons for caution. <\/p>\n

First, stockbuilding has fallen sharply but only to a “normal” level by historical standards. Further weakness seems likely given the extent of overaccumulation in 2021-23. <\/p>\n

Second, a monthly inventories indicator derived from business surveys, which is more timely and usually leads by several months, has yet to signal a turning point – chart 3. <\/p>\n

Chart 3<\/strong><\/p>\n

\"\"<\/span><\/span><\/p>\n

Third, and most importantly, stockbuilding cycle recoveries historically were preceded by a pick-up in real narrow money momentum, which remains very weak – chart 4. <\/p>\n

Chart 4<\/strong><\/p>\n

\"\"<\/span><\/span><\/p>\n

The price to book relative of non-tech cyclical sectors versus defensive sectors is below its long-run average but the divergence is smaller than at most recent stockbuilding cycle lows – chart 5. <\/p>\n

Chart 5<\/strong><\/p>\n

\"\"<\/span><\/span><\/p>\n

There is a risk of another bout of market weakness \/ cyclical underperformance as the stockbuilding cycle moves into a trough. The judgement here is that a revival in real money momentum is necessary to signal that a cycle low will be followed by a sufficiently solid recovery to boost cyclical assets.<\/p>\n

—–
\nCOMMENT:
\nAUTHOR: David Cotton
\nEMAIL: mrwbartholomew@gmail.com
\nIP: 82.132.246.167
\nURL:
\nDATE: 05\/24\/2023 10:10:55 AM<\/p>\n

Your chart would seem to suggest a bottom in the cycle around q4 with a mirroring decline from the peak. The cycle should net to zero in the long term ?<\/p>\n

—–
\nCOMMENT:
\nAUTHOR: Simon Ward
\nDATE: 06\/01\/2023 03:09:05 PM<\/p>\n

Yes, the effect should be neutral over the cycle.<\/p>\n","protected":false},"excerpt":{"rendered":"

The stockbuilding cycle is on course to bottom soon and upturns have historically been associated with a procyclical shift in market behaviour. Several considerations, however, argue for caution about positioning for such a shift now.  The key indicator used to monitor the cycle here is the annual change in G7 stockbuilding expressed as a percentage […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-4664","post","type-post","status-publish","format-standard","hentry","category-money-moves-markets"],"_links":{"self":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/4664","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=4664"}],"version-history":[{"count":1,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/4664\/revisions"}],"predecessor-version":[{"id":6973,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/4664\/revisions\/6973"}],"wp:attachment":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=4664"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=4664"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=4664"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}