February 14, 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. 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. Inflation-adjusted Retail Sales are still trending higher. Not a long term bearish sign for the stock market and economy
  2. Corporate profits continue to trend higher. Suggests that the bull market in stocks probably isn’t over.
  3. Initial Claims are trending sideways. Not long term bearish for U.S. stocks yet, but will be bearish in 2019 if Initial Claims starts to trend upwards significantly.
  4. Continued Claims are trending sideways. Not long term bearish for U.S. stocks yet, but will be bearish in 2019 if Continued Claims starts to trend upwards significantly.

Read “Retail sales crashed: it’s 2008 all over again for the stock market and economy!”
Inflation-adjusted Retail Sales are still trending higher. Not a long term bearish sign for the stock market and economy
Today’s reading for inflation-adjusted Retail Sales went down a little. However, the key point is that inflation-adjusted Retail Sales are still trending higher.

This indicator suggests that the equities bull market is not over because inflation-adjusted Retail Sales typically trend sideways before an equities bear market or economic recession begins.
Corporate profits continue to trend higher. A medium term bullish sign for the stock market.
Corporate profits are still trending higher, even after adjusting for inflation.

This suggests that the bull market is not over. Historically, corporate profits (inflation-adjusted) tend to go down for a few quarters before an equities bear market or recession begins (see study)
Initial Claims are trending sideways. Not long term bearish for U.S. stocks yet, but will be bearish in 2019 if Initial Claims starts to trend upwards significantly.
Yesterday’s reading for Initial Claims went up (from 235k to 239k). The key point is that Initial Claims is trending sideways

*Initial Claims leads the economy and stock market. Historically, it trends higher before a bear market in stocks started (see study).

We are watching out for any SUSTAINED increase in this data series because Initial Claims are very low right now (historically speaking).
Continued Claims are trending sideways. Not long term bearish for U.S. stocks yet, but will be bearish in 2019 if Continued Claims starts to trend upwards significantly.
Yesterday’s reading for Continued Claims went up (from 1.736 million to 1.773 million). Continued Claims are trending sideways now, and could potentially trend upwards over the next few weeks/months

Like Initial Claims, Continued Claims leads the stock market and economy.

We are watching out for any SUSTAINED increase in this data series because Continued Claims are very low right now (historically speaking).

Conclusion

Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk:reward is no longer bullish. In a most optimstic scenario, the bull market probably has 1 year left. Long term risk:reward is more important than trying to predict exact tops and bottoms.
  2. The medium term direction (i.e. next 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 bearish lean due to the large probability of a pullback/retestFocus 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.
Click here for more market studies