March 5, 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. New Home Sales is trending sideways/downwards. Something that bulls should watch out for
  2. ISM non-manufacturing PMI is still a bullish factor for the stock market.
  3. Inflation-adjusted New Orders are still trending sideways/upwards. This indicator suggests that the bull market is not over.
  4. Net earnings revisions is solidly negative. A necessary but not sufficient condition for bear markets and recessions.
  5. The nonfinancial sector’s Unit Profits are trending sideways. A late-cycle sign

Read The stock market’s rally is slowing down. Expect a surge in volatility?
New Home Sales 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 New Home Sales went up from its previous reading.

However, the key point is that New Home Sales is still trending sideways / downwards. Historically, New Home Sales 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.
ISM non-manufacturing PMI is still a bullish factor for the stock market
The latest reading for ISM non-manufacturing PMI went up from its previous reading. However, the key point is that non-manufacturing PMI is still trending upwards. In the past, non-manufacturing PMI trended downwards before bear markets and recessions began.

Inflation-adjusted New Orders are still trending sideways/upwards. This indicator 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.
Net earnings revisions is solidly negative. A necessary but not sufficient condition for bear markets and recessions.
As of February 2019, the S&P 500’s net earnings revisions is solidly negative.

The S&P 500’s Net Earnings Revisions turns negative before economic recessions and equity bear markets begin. During economic expansions, it has shown mixed performances because analysts tend to downgrade their earnings expectations as the year goes on. That’s why negative Net Earnings Revisions is a necessary but not sufficient requirement for equities bear markets and economic recessions.
This “necessary but not sufficient requirement for bear markets” is now triggered.
The nonfinancial sector’s Unit Profits are trending sideways. A late-cycle sign
The latest reading for nonfinancial sector’s Unit Profits went up from the previous reading.

However, the more important point is that Unit Profits are trending sideways. This is a typical late-cycle sign for the stock market and economy. In the past, Unit Profits trended sideways or downwards for several years before bull markets and economic expansions ended.

*While this is a late-cycle sign, it is not a timing indicator for the stock market and economy. It cannot be used to approximate when the bull market and economic expansion will end.

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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