Stocks on November 26, 2018: fundamental outlook


*Go to the blog for my latest market outlook. Members can go here to see our trading model’s latest updates and how we’re trading the U.S. stock market right now based on these models.
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. New Orders are still trending higher. Medium term bullish for stocks
  2. Delinquency Rate is trending downwards. This is not how bear markets start.
  3. Wage growth is rising. Neither bullish nor bearish for the stock market and economy.
  4. Capital spending is decreasing. Long term bearish for stocks next year.

Read The yield curve will invert soon. What’s next for the stock market
1 am: New Orders are still trending higher. Medium term bullish for stocks
The value of manufacturer’s new orders continues to trend higher. This is medium term bullish for the stock market. In the past, new orders trended sideways before recessions and bear markets began.

This becomes even more clear when you adjust new orders for inflation. After adjusting for inflation, it’s clear that new orders trends downwards before bear markets and recessions begin.

1 am: Delinquency Rate is trending downwards. This is not how bear markets start.
The latest reading for Delinquency Rates made a new low for this economic expansion. But more importantly, delinquency Rates on loans from commercial banks are still trending downwards.

This is a medium term bullish sign for the stock market and economy. As you can see in the chart below, Delinquency Rates tend to trend higher before equity bear markets and economic recessions begin.

1 am: Wage growth is rising. Neither bullish nor bearish for the economy.
One of the biggest complaints by pundits is that wage growth has been low throughout this economic expansion. Real inflatino-adjusted wages have been rising recently.

You can clearly see in the above chart that inflation-adjusted wage growth has very little impact on economic expansions. Sometimes economic expansions and bull markets occur when real wages are rising. Sometimes economic expansions and bull markets occur when real wages are falling. This is neither consistently bullish nor bearish for the stock market.
1 am: Capital spending is decreasing. Long term bearish for stocks next year.
CEO outlook leads capital spending by approximately 2 quarters. Capital spending peaked in Q2 2018, and fell in Q3 2018. With CEO outlook trending downwards, this suggests that capital spending will also trend downwards over the next few quarters.

In the previous bull market, Capital Spending really started to trend downwards after Q4 2006. It was 10 months before the next bear market started.
Capital spending likely peaked in Q2 2018. If we use the 2007 analogy, this suggests that stocks will peak in Q2 2019.
Read Stocks on November 22, 2018: outlook

Outlook

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

  1. The S&P 500 has less than 3 quarters left in this bull market (bull market top sometime in Q2 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 not 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.