March 12, 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.

  1. Financial conditions are very loose. Not yet a long term bearish sign for the stock market.
  2. The yield curve has not yet inverted. This is not yet a long term bearish sign for stocks, but will be when the yield curve inverts.
  3. Banks’ lending standards have tightened dramatically.  If this persists, long term bulls should watch out.

Read Is the stock market still in a bear market?
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.

The yield curve has not yet inverted. This is not yet a long term bearish sign for stocks, but will be when the yield curve inverts.
The main parts of the yield curve have not yet inverted.

  1. 10 year – 2 year yield curve
  2. 10 year – 3 month yield curve

In the past, economic recessions and bear markets came AFTER these parts of the yield curve inverted.


Not yet long term bearish for stocks, but something to watch out for because the yield curve is so close to inverting.


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.

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 optimistic 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 (e.g. next 6-9 months) is more bullish than 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 does not reflect how we trade the markets right now. We trade based on our quantitative trading models. When our discretionary outlook conflicts with our models, we always follow our 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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