U.S. stock market on June 21, 2017: thoughts and outlook

*These are our short term thoughts on the market. We combine our medium-long term model and discretionary outlook when making investment decisions. We’re looking at how the market reacts to news, earnings, and other fundamental themes related to the key individual sectors.
Go to our homepage for our latest market outlook.

Stock index & news

The Citigroup Economic Surprise Index continues to crater
The Economic Surprise Index is an aggregate of the economic data beating/missing vs analysts’ expectations. This does not impact the medium-long term outlook for the U.S. stock market at all. In order for the index to improve (aka in order for the economic data to “beat” expectations), analysts simply have to lower their estimates fast enough. Focus on whether the data is improving vs itself. Ignore analysts expectations for your medium-long term outlook.
However, when the Economic Surprise Index was as low as it was June 15, a “small correction” always ensued within 4 months (historically). Here was our study.
The Economic Surprise Index has crashed since last week. It was at -57 on June 14, and is now at -77 on June 20.

There were only a few cases in which the Index fell below -75 since 2003 (when the Index began). Here’s what happened to the S&P 500 after the Economic Surprise Index fell below -75.
June 1, 2011
The S&P 500 was in the first leg of its significant correction.
November 3, 2008
This was a bear market case. It does not apply today because our model states that this is still a bull market.
March 13, 2008
This was a bear market case. It does not apply today because our model states that this is still a bull market.
August 13, 2004
This was the bottom of the S&P’s “small correction” from March-August 2004.
March 11, 2003
This was the very bottom of the 2000-2003 bear market. Clearly this does not apply today. The U.S. stock market has been in a bull market for 8 years.
Based on these cases, the S&P is already in the beginning of a correction. We don’t use this indicator in our model because there is not enough historical data. It only goes back to 2003. And since this data is so limited, take the short-medium term bearish sign with a grain of salt.
However, the overall trend in the economic data still points to continued U.S. economic growth. Hence, this is still a bull market. The crash in the Economic Surprise Index is enough to be followed by a “small correction”, but cannot cause a bear market or significant correction (as defined by our model).
Correlation between oil and the S&P
There is a small correlation between oil and the S&P right now. Oil fell (again) from 11am – 1 pm. The S&P also fell from 11am – 1pm. These correlations aren’t very useful to investors because correlations can break at any moment without notice.
Mueller’s Trump-Russia investigation
In an interview with Bloomberg yesterday, former NSA director Michael Hayden said that the Mueller investigation will take at least an entire year before releasing any official results. If he’s right, then the Trump-Russia investigation will not be a real concern to the stock market until 2018 when the official reports are released.
Is wage inflation coming?
The final leg of a bull market and economic expansion is usually accompanied by rising inflation.
I listened to a really interesting Bloomberg podcast yesterday. The topic was “if economic growth has been modest/strong over the past 20 years, why has wage growth been so low?” The hosts gave an interesting explanation, and I do partially agree.
NAFTA was signed in January 1994. Since then, millions of “undocumented workers” (aka illegal immigrants) have flooded through America’s southern border. The Bloomberg hosts were saying that this massive influx of undocumented workers has kept wage growth low over the past 20 years. These workers usually get paid below-minimum wage. Their employment has kept a lid on minimum wages.
Perhaps this is part of the reason why unemployment is low right now but wage growth is low as well.
The Bloomberg hosts mentioned that the shrinking pool of undocumented workers is causing a labor shortage in low-wage industries like U.S. agriculture (e.g. illegal immigrants who pick strawberries). These illegal immigrants are terrified. Since Trump’s election, the arrest of illegal workers has jumped 38%!
Here’s my random guess. This doesn’t impact our market outlook.

Will wage growth in the U.S. pick up in the next few years partially because the pool of low-wage illegal workers is shrinking?

If so, then that fits with the “inflation theme” that drives the final leg of most bull markets.

Bottom line

Nothing has changed since our June 20 bottom line. But it’s increasingly likely that this is the small correction we’ve been waiting for (as opposed to the S&P beginning a small correction in September/October 2017).
Right now:

  1. Our model says that this is a big rally in a bull market. There is no significant correction on the horizon.
  2. Despite our model’s bullishness, we’re sitting on 100% cash. By the end of June 2017, the current “small rally” will be longer than 96% of all historical small rallies.
  3. We’re waiting for the next 6%+ small correction. Then we’ll shift into 100% long UPRO (3x S&P 500 ETF).


There was nothing abnormal in the sectors today.

  1. The energy sector underperformed because oil fell (again).
  2. The financial sector underperformed the S&P.
  3. The tech sector outperformed. This is normal for bull markets. Story stocks like FAANG will continue to generally outperform until the bull market is over.

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