February 11, 2019: fundamental outlook for stocks


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

Thoughts

*We’re seeing mixed readings in the leading economic indicators right now. Some are still bullish while others are turning bearish. This is typically what happens towards the end of bull markets, when leading indicators start to deteriorate one at a time.
*An imminent recession is very unlikely right now. However, a recession is possible in late-2019 or 2020. Wait and see the latest data.

  1. Long term bulls should watch out if Heavy Truck Sales continue to trend downwards.
  2. Banks’ lending standards have tightened dramatically.  If this persists, long term bulls should watch out.
  3. Inflation-adjusted New Orders are still trending sideways/upwards. This indicator suggests that the bull market is not over.
  4. Financial conditions are very loose. Not yet a long term bearish sign for the stock market.

Long term bulls should watch out if Heavy Truck Sales continue to trend downwards
The latest reading for Heavy Truck Sales went down from 511k to 488k. While Heavy Truck Sales have fallen a little, the downwards trend is not yet significant. Historically, Heavy Truck Sales trended downwards before bear markets and economic recessions began (see study)

This is not yet a clear long term bearish sign. Wait for more data before jumping to conclusions.

  1. If Heavy Truck Sales continue to trend downwards for several months, that will be a long term bearish sign.
  2. If Heavy Truck Sales don’t trend downwards for another few months, then you know that the recent decline was just a temporary dip.

Banks’ lending standards have tightened dramatically.  If this persists, long term bulls should watch out.
The latest reading for Banks’ Lending Standards tightened significantly. This is important, because credit is the lifeblood of the U.S. economy.

One data-point does not make a trend, so this is not yet a long term bearish factor. But if Lending Standards continue to trend higher throughout 2019, long term bulls should watch out.
In the past, Lending Standards tightened before bear markets and economic recessions began.
Inflation-adjusted New Orders are still trending sideways/upwards. Suggests that the bull market is not over.
The inflation-adjusted New Orders for Consumer Goods is still trending sideways/upwards.

This indicator suggests that while late-cycle, the bull market in stocks probably is not over. In the past, inflation-adjusted New Orders trended downwards before bear markets and economic recessions began.
Financial conditions are very loose. Not yet a long term bearish sign for the stock market.
Financial conditions are still very loose despite the stock market’s crash in Q4 2018.


This is not a long term bearish factor for the stock market right now because historically, financial conditions tightened significantly before bear markets and recessions started.

Conclusion

Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk:reward is no longer bullish. This doesn’t necessarily mean that the bull market is over. We’re merely talking about long term risk:reward. Long term risk:reward is more important than trying to predict exact tops and bottoms.
  2. The medium term direction (i.e. next 3-6 months) is neutral. Some market studies are medium term bullish while others are medium term bearish
  3. The stock market’s short term has a slight bearish lean. Focus on the medium-long term (and especially the long term) because the short term is extremely hard to predict.

Goldman Sachs’ Bull/Bear Indicator demonstrates that while the bull market’s top isn’t necessarily in, risk:reward does favor long term bears.

Our discretionary outlook is not a reflection of how we’re trading the markets right now. We trade based on our quantitative trading models.
Members can see exactly how we’re trading the U.S. stock market right now based on our trading models.
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