Stocks on December 3, 2018: fundamental outlook

by Troy

The economy and stock market move in the same direction in the medium-long term. Hence, leading economic indicators are also leading indicators for the stock market.

Thoughts

  1. Inflation-adjusted personal consumption expenditures are trending sideways. Suggests that the current decline is not the start of a bear market.
  2. Capacity utilization is trending upwards. Suggests that the bull market isn’t over
  3. Consumer Confidence is extremely high. A sign of late-cycle behavior.
  4. Unit profits are down: this equities bull market doesn’t have a lot of years left.

1 am: Inflation-adjusted personal consumption expenditures are trending sideways. Suggests that the current decline is not the start of a bear market.

The year-over-year change in Inflation-adjusted personal consumption expenditures is trending sideways.

Historically, this data series trended downwards in the beginning of a bear market & economic recession. This suggests that the stock market’s recent decline is a correction and not the start of a bear market.

1 am: Capacity utilization is trending upwards. Suggests that the bull market isn’t over

Capacity utilization continues to trend higher.

In the past, Capacity Utilization trended sideways or downwards before bear markets and recessions began. This is because as the economy becomes “as good as it gets”, industry has excess supply and rising inventories, so it no longer needs to expand capacity utilization.

1 am: Consumer Confidence is extremely high right now. A sign of late-cycle behavior.

Consumer Confidence remains very high right now.

You can see that Consumer Confidence was this high from 1967 – 1968 and 1997 – 2000. While this isn’t a timing indicator (it doesn’t tell you when the bull market will top), it does tell you that the bull market doesn’t have many years left. This is a late-cycle sign.

1 am: Unit profits are down: this equities bull market doesn’t have a lot of years left.

Corporate unit profits have been trending downwards since the end of 2014.

This IS NOT a timing indicator for predicting the end of bull markets. Sometimes unit profits will fall a year or two before recessions and bear markets begin. Sometimes unit profits will fall for half a decade before bear markets begin. But this does tell us that 2014/2015 marked the halfway point for this economic expansion and bull market.

This indicator suggests that this equities bull market doesn’t have many years left.

Read Stocks on November 29, 2018: outlook

Outlook

Here’s what I think will happen based on our discretionary fundamental outlook:

  1. The S&P 500 has less than 3 quarters left in this bull market (bull market top sometime in Q2 2019).
  2. The recent decline is just a correction in a bull market. The medium term direction is still bullish  (i.e. trend for the next 6-9 months)
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