Stocks on October 29, 2018: fundamental outlook


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

Thoughts

  1. The economy is almost at full employment. While this is probably still a bull market, the bull market doesn’t have a lot more room to run.
  2. Corporate buybacks have surged, and will probably remain elevated. This gives the bull market a little more room for the next half year.
  3. Truck Tonnage is trending higher. A medium term bullish sign for the stock market.
  4. Federal tax receipts dipped. NOT bearish for the economy and stock market.
  5. The S&P 500’s seasonality is bullish in November.

Read Is the stock market’s rapid decline the start of something much bigger?
1 am: The economy is almost at while employment. While this is probably still a bull market, the bull market doesn’t have a lot more room to run.
A better measure of “full employment” = Unemployment Rate – CPI (inflation). As you can see from the following chart, this data series tends to reach 0 towards the end of an economic expansion and equities bull market.

The Unemployment Rate – CPI is currently at 1.42%, which means that:

  1. The economic expansion and bull market are not over, but…
  2. We are in the last leg of this bull market.

1 am: Corporate buybacks have surged, and will probably continue to surge. This gives the bull market a little more room for the next half year.
Some traders and investors see corporate buybacks as “evil”. We’re not going to get into that argument because it’s meaningless. We’re traders, not policy makers.
Instead, let’s look at corporate buybacks objectively. Corporate buybacks have surged for 2 quarters (Q1 and Q2 2018).

Now before you listen to the “holy shit corporate buybacks are as high as they were back in 2007” permabears, realize that this is a NOMINAL data series (not adjusted for inflation). On a non-inflation adjusted scale, everything is going to make new highs in the long term. That is why we prefer log scales and inflation-adjusted charts.
When adjusted for inflation, corporate buybacks are still 20% lower than they were in 2007. But nonetheless, this is a surge in buybacks compared to pre-2018 levels.
Corporate buybacks have mostly put a floor under the stock market this year, preventing a “big correction” (i.e. a 15%+ decline). A surge in corporate buybacks = more demand for stocks.
Corporate buybacks peaked at around the same time as stocks did in Q3 2007. Thanks to the Trump tax cut, we can reasonably believe that buybacks will remain strong throughout the rest of 2018, which suggests that the bull market’s top is in 2019 and not 2018.
1 am: Truck Tonnage is trending higher. A medium term bullish sign for the stock market.
Truck Tonnage measures the volume of the movement of freight in the U.S. This indicator tends to flatten or fall before an equities bear market or economic recession begins.

The latest reading for Truck Tonnage continues to trend higher. This suggests that the bull market in U.S. stocks will continue.

This is a longer term chart for Truck Tonnage (not updated, from Bill McBride).

1 am: Federal tax receipts dipped. NOT bearish for the economy and stock market.
Federal tax receipts have been trending downwards.

Some investors see this as a bearish sign. They think falling tax receipts means that the economy and corporate earnings are going down. We disagree.
Tax receipts are going down because of Trump’s tax cut. It has nothing to do with the economy. In fact, the economy and corporate earnings are strong right now, which is medium term bullish for the stock market.
You can see that dips in federal tax receipts during economic expansions are normal: they’re usually caused by tax cuts.

1 am: The S&P 500’s seasonality is bullish in November.
Seasonality is of secondary importance when compared to the stock market’s own price action. However, it is still worth looking at seasonality.
November is the second most bullish month for the S&P 500 in terms of seasonality. Just something to think about.

Read Stocks on October 27, 2018: outlook

Outlook

Here’s what I think will happen based on our discretionary outlook:

  1. The S&P 500 has less than 1 year left in this bull market (bull market top sometime in 2019).
  2. The recent decline is just a correction in a bull market. The medium term direction is still bullish  (i.e. trend for the next 6-9 months)

Our discretionary outlook is usually, but not always, a reflection of how we’re trading the markets right now. We trade based on our clear, quantitative trading models, such as the Medium-Long Term Model.
Members can see exactly how we’re trading the U.S. stock market right now based on our trading models.

1 comment add yours

  1. Because in 2017 I tried to predict “small corrections”, and it didn’t work. So not spending time on that now.

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