The stock market and economy move in the same direction over the medium-long term. That’s why it’s extremely important to understand the state of a nation’s economy. Is the economic data improving or deteriorating?
Let’s take a look at U.S. economic data as of the end of October 2018.
The Unemployment Rate continues to trend downwards.
The Unemployment Rate has yet to trend upwards, so this is not yet a bearish sign for the stock market and economy.
The unemployment rate is extremely low right now (when compared to history). We aren’t concerned yet, but we are watching out for a sustained increase in the unemployment rate.
U.S. inflation is swinging in a range between 2% – 3%. There’s nothing particularly worth noting here.
Initial Jobless Claims and Continued Claims
Initial Jobless Claims and Continued Claims are still trending down right now. This is a medium term bullish sign for the stock market because jobless claims tend to rise before bear markets and recessions begin.
*Initial Jobless Claims and Continued Claims are very low right now (historically speaking). We are not concerned yet, but we are watching out for any sustained and significant increase in these 2 data series.
Heavy Truck Sales
Heavy Truck Sales are still trending upwards. This is medium term bullish for the stock market, because Heavy Truck Sales tend to trend downwards before recessions began.
Corporate Profits continue to trend higher. In the past, this data trended lower for at least 2 quarters before bull markets topped.
ISM Manufacturing PMI
ISM Manufacturing PMI is starting to trend downwards. This will be a weak point in the economy if it starts to trend downwards in Q1 2019.
Industrial Production Growth
Industrial Production’s manufacturing sector growth is still trending higher. Industrial Production growth (excluding Mining & Utilities) tends to trend downwards before a recession and bear market begins.
Total vehicle sales
Vehicle sales have been trending downwards a little over the past year. This suggests that we are in the late stages of this bull market.
U.S. Consumer Sentiment continues to trend higher.
Retail Sales (inflation-adjusted)
Inflation-adjusted Retail Sales is still trending upwards. This suggests that a bear market and recession are not imminent. Historically, inflation-adjusted Retail Sales trended sideways before a bear market and recession began.
Housing has started to deteriorate. If this continues, it will be a major concern in Q1 2019.
This is New Home Sales and Building Permits
U.S. economic growth is mostly solid.
However, we’ve recently seen the first signs of U.S. economic deterioration. A bull market’s top is a long process.
- The economy first shows signs of economic deterioration. Large-ticket items (housing and auto sales) are the first to deteriorate. Meanwhile, the stock market goes up.
- The economy deteriorates a little more. The labor market (e.g. Initial Claims) starts to deteriorate. Meanwhile, the stock market goes up but the rally becomes even choppier.
- Finally, the stock market tops, and starts to go down.
- Lastly, the economy begins a recession.
We are now in Step 1 of this process. Housing and other big ticket purchases are deteriorating, while most of the economy is still improving.
*It’s not the month-to-month data that matters. It’s the overall trend in the data.