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 September 2018.
After trending downwards for many years, the Unemployment Rate is finally starting to trend sideways.
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 rising very slowly above 2.5%. Indicators suggest that inflation will swing between 2.5% – 3% in 2018.
*Many investors expected inflation to “surge” in 2018. This is clearly not the case.
Initial Jobless Claims and Continued Claims
Initial Jobless Claims and Continued Claims are still trending down right now. This is a long 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.
Nonfarm payrolls growth has been trending sideways for the past few years. Nonfarm payrolls is not a leading indicator for the stock market or economy – it’s a coincident indicator. This indicator peaks when the stock market and economy peak.
Heavy Truck Sales
Even though Heavy Truck Sales dipped a little recently, the key point is that Heavy Truck Sales are still trending upwards.
Corporate profits (a leading indicator for the stock market and economy) continue to trend higher.
Corporate profit growth will probably slow down over the next few quarters. But even if growth slows down, the more important point is that corporate profits will probably STILL continue to grow (albeit at a slower pace) over the next few quarters.
ISM Manufacturing PMI
ISM Manufacturing continues to trend upwards. This is a medium-long term bullish sign for stocks.
Industrial Production Growth
Industrial Production’s manufacturing sector growth is still trending higher. The trend is more important than month-to-month changes. 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 at least in the final quarter of this economic expansion and equities 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 deteriorated a little recently. This is not a major concern right now, but watch out in case housing continues to deteriorate over the next few months.
This is New Home Sales
This is Building Permits
This is Housing Starts
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.
Based on where the Medium-Long Term Model is today, this bull market probably has approximately 1 year left.
*It’s not the month-to-month data that matters. It’s the overall trend in the data.
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Disclaimer: Consult your financial professional before making any investment decision.