March 26, 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. Housing Starts is trending sideways/downwards. Something that bulls should watch out for
  2. Building Permits is trending sideways. Something that bulls should watch out for
  3. Consumer Confidence is very high
  4. Labor market conditions still suggests that the economic expansion is not over.

ALL 3 OF THESE NEED TO BE UPDATED
Housing Starts is trending sideways/downwards. Something that bulls should watch out for
Housing is one of the earliest leading sectors for the stock market and economy. The latest reading for Housing Starts went down from its previous reading.

However, the key point is that Housing Starts is still trending sideways / downwards. Historically, Housing Starts trended downwards before recessions and bear markets began.

Housing is a weak point in the U.S. economy. This is something that bulls should watch out for if the weakness in Housing Starts persists for a few more months.
Building Permits is trending sideways. Something that bulls should watch out for
The latest reading for Building Permits went down from its previous reading.

However, the key point is that Building Permits is trending sideways. Historically, Building Permits trended downwards before recessions and bear markets began.

This is not yet a long term bearish sign for the U.S. economy and stock market, but is something that bulls should watch out for.
Consumer Confidence is very high
The Conference Board’s Consumer Confidence Index remains extremely high, and is above 120 right now.

While this is a normal late-cycle sign for the bull market and economic expansion, it is not an immediately long term bearish sign.

  1. Consumer Confidence can stay elevated for a long time. I.e. this happened from 1997 – 2000
  2. “High” Consumer Confidence can become even higher. For example, Consumer Confidence consistently peaked at 120 from 1970 – 1995. But from 1996-2000, Consumer Confidence made new highs. There is no such thing as “too high”


Labor market conditions still suggests that the economic expansion is not over.
The Kansas City Fed creates a Labor Markets Conditions Index, which is turned into a momentum indicator. This measures the strength of the labor market.
The U.S. labor market is healthy right now. This suggests that the bull market in stocks, although late-cycle, is not over. You can see that labor market conditions fell to zero at the top of previous bull market peaks.

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 mostly mixed, although there is a bullish lean.

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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