A Recession of the Have-Nots By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - Laying out the case for a "have-nots" recession...
- We were early on this call, but might not be wrong...
- Harris' housing plan is hard to dislike...
- The seasonal stock buys to make on Monday...
- How Eric Fry finds "stealth" AI companies (here's one of them)...
We're likely in the weirdest recession in U.S. history... I won't get any accolades for saying it, and I'm not looking for them.
My only hope is that, from reading this letter, your wealth-building journey is as smooth as possible.
But I believe we're already in a recession in the U.S.
This is no ordinary recession, mind you. In retrospect, it'll prove to be an altogether mild one. But it's also the first one, to our mind, that will adversely impact the least-wealthy Americans.
In other words, it's a recession of the "have-nots."
We first started observing this low-key recession on June 1. Back then, a poll was making the rounds that showed 56% of Americans presumed the economy was in recession, stocks were down, and unemployment was high.
Most in the mainstream media took a frankly sickening, holier-than-thou stance on this – insisting people are just misinformed.
On the contrary, I believe that if 56% of Americans feel this way even if the data says otherwise, that's the first sign that something isn't right. There've been plenty more since. - Fast food companies are in an all-out value meal war, shrinking their margins as much as possible to keep price-sensitive customers coming through the door.
- Earnings at major retailers like Starbucks (SBUX), Dollar General (DG), and Walmart (WMT) show that lower-income consumers are cutting back on discretionary purchases and sticking with the essentials.
- The jobs numbers continue to weaken. Claudia Sahm may have attempted to debunk her own recession indicator two weeks ago, but it doesn't stop the fact that recent revisions presume there were actually 818,000 fewer jobs created than were originally reported.
People aren't working like they were a year ago. They aren't spending like they were a year ago. And they're spending so little, fast food companies are bending over backwards to get them back in the door.
To our mind, we don't need to see two quarters of negative GDP growth next year to confirm it. Consumer behavior is changing, and that's what matters.
One of the first pieces I ever wrote for TradeSmith Daily – called "American Consumer, Meet Brick Wall" – was early, but probably not wrong.
The consumer is stretched.
Credit card delinquencies are at a 10-year high and rising. 
Credit card balances (including other forms of revolving debt) are at an all-time high. 
The personal savings rate is at its lowest point since 2022. 
This tells me we should be very wary of investing in highly discretionary or luxury stocks. The housing market may be a different story... We won't beat up Kamala Harris' anti "price gouging" policy anymore. We did plenty of that in Wednesday's digest. And, perhaps naively, we like to think that even a Democratic majority would have the sense not to push such a policy through to law.
Instead, let's look closely at her housing plan, because there's actually some good stuff there, and it could directly impact an already bullish sector in a positive way.
There are three main elements to the plan: 1. Subsidies for first-time homebuyers – $25k in down payment support and a $10k tax credit.
We're mixed on this. One could argue that a guaranteed $25,000 government subsidy for first-time homebuyers may well artificially inflate the prices of all homes as a result. Same with the tax credit, though perhaps to a lesser extent. Still, it will at least drive homeownership... and wealth... so long as this assistance isn't handed out to folks who can't actually afford the home they're using it on. 2. "Eat the rich"-style regulation – banning algorithm-driven price-setting tools for rent prices, and removing tax benefits for investors with large single-family rental home portfolios.
There aren't any specifics to these plans as of yet, but the former seems like a weakhanded and vague attempt at rent control (not so good). The latter is a more debatable issue, but one where I fall on the side of "fine."
It's the third element, housing development, where there's a lot to love. 3. Affordable housing incentives and YIMBYism – Tax incentives for affordable starter homes, expansion of a tax incentive for builders of affordable units, a $40 billion "innovation fund" to spur "innovative" housing construction, and allotting some federally-held land for affordable housing units.
I'll ask you to set aside the question of how we'll afford all this - if you haven't already. (The government has, as always, so we might as well too.)
The first two policies for tax incentives to build starter homes is a great idea. A big issue with the current housing market is a lack of supply in desirable areas. And in those desirable areas, much of the new developments are for less-than-starter-level homes aimed at transplants and those looking to upgrade. Incentivizing homebuilders to make more affordable housing will help solve that.
Part of the supply issue is high interest rates – or rather, homeowners who locked in extraordinarily low interest rates in 2021 and are patiently waiting for some relief to move out of their starter homes and upgrade. (In fact, this is the very situation your editor finds himself in.)
The Federal Reserve is the only one who can do something about that (for now), but building new supply is the next best thing.
If these policies come to fruition, we should see plenty of support from homebuilders like D.R. Horton (DHI), Lennar (LEN), and NVR (NVR).
And not only that, but more federal land could open up for those builders to use. It's the ultimate YIMBY (Yes In My Backyard) move: creating more backyard.
Depending on how that's executed, we could see an increased rate of new towns and cities form – in itself a big economic opportunity.
Homebuilders are already enjoying the prospect of lower interest rates, which will drive demand for new units. And those rate cuts are coming no matter who's in the White House. But if we do see a Harris presidency and she delivers on these ideas, homebuilders could become a standout winner, so they're a space to watch.
The sector has well outperformed stocks over the last five years as it is... 
From what we see, that outperformance is likely to continue so long as there's strong demand for new housing of all sizes. Lower interest rates and more options should help drive that. If markets are going to stick to the volatility script, you'll need an edge... Meanwhile, our data shows that volatility generally rises through the next couple months, peaking just before the November elections, as we've been showing you here in TradeSmith Daily.
Here's the latest Trade Cycles Seasonality chart for the CBOE Volatility Index (VIX) for election years. As you can see, the VIX rises an average of more than 58% from now through the peak on Oct. 28, with a positive movement in the VIX happening seven out of eight of the last election cycles: 
Because of this chart, we feel it's prudent to stay cautious. Indeed, the day we're looking at this chart (Wednesday) is historically the lowest point of volatility for the rest of the year.
So what should you do in the face of this potential surge?
One idea is to hide out in the best-performing stocks for this period.
I ran a screen on the S&P 500 to see which stocks perform best between Aug. 21 and Oct. 28 going as far back as 1950. And while the companies themselves haven't been around that long, here is the winning group: | Symbol | Years | Win% | Avg Loss | Avg Win | Avg Return | | CBOE | 14 | 78.57% | -8.54% | 8.86% | 5.13% | | KEYS | 10 | 77.78% | -5.38% | 7.96% | 4.99% | | CB | 31 | 74.19% | -5.53% | 8.68% | 5.01% | | COST | 38 | 71.05% | -9.04% | 7.72% | 2.87% | | CRM | 20 | 70.00% | -11.53% | 19.19% | 9.97% |
(Disclosure, I own COST and CBOE.)
Ranking the top of the list is CBOE, with an average win rate of 78.57%. Its average winning trade is 8.86%, and its average trade overall is 5.13%; that's a solid bet with a strong win rate. But look further down the list for what may be the best profit potential.
In that we find CRM, which, while its win rate is lower, at 70% on 20 years of data, has an average win of 19.19% and an average trade – counting wins and losses – of 9.97%.
Keep these ideas in your back pocket if we wind up seeing a bumpy road ahead. These stocks have the highest odds of staying afloat amid seasonal turmoil. The biggest thing I learned about investing this week... Is that the best investments in the AI space are in the companies who you'd never know are even using it.
We know Microsoft is using AI right now – it's making a huge deal about Copilot. And Google about Gemini. And Apple's "Apple Intelligence" will soon be front and center on iPhones.
But at least for the time being, these are not strong revenue generators for these companies. They're, in fact, the opposite – they're the product of billions in investment that's yet to be monetized... which these companies may never truly recoup.
That's fine for mega-cap techs with huge cash piles. I'm just saying you can't expect them to enjoy the same level of impact from AI as with smaller AI companies.
That's why Eric Fry – global macro strategist at InvestorPlace – has been looking deeper than these big first-mover AI applications.
And in doing so, he's uncovered a number of what I'll call "stealth AI" opportunities where you could invest before the crowd catches on.
One of them, a small-cap, speculative company, deals with a ubiquitous problem that everyone who's traveled has gone through. The company's using AI to making life a little easier, and business a lot more efficient, for everyone. And they're already putting their products in major travel centers.
This is the stock Eric shared for free yesterday in his research presentation called "The Road to AGI." In that presentation, he also shared his vision for what a future with sophisticated, self-teaching AI agents could look like and what it implies about the stock market.
I highly urge you to tune in to the replay of Eric's webinar. More than a free pick on a promising company, it offers a comprehensive view of the AI investment landscape and a battleplan for what could lie ahead.
Watch The Road to AGI right here. Then be sure to tune in to tomorrow's Daily. If you're looking for more from Eric, I just recorded an interview with him where we delve more deeply into what his free AI pick does and why it's so impactful. To your health and wealth,  Michael Salvatore
Editor, TradeSmith | 
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