The stock market and economy move in sync over the medium-long term. That’s why it’s extremely important to understand the state of a nation’s economy. Is the economic data improving or deteriorating?
Let’s take a look at U.S. economic data as of May 2018.
The U.S. Unemployment Rate continues to fall and trend downwards.
This is a medium-long term bullish sign for the economy. Historically, the unemployment rate tends to trend sideways or upwards before a bear market and recession begins.
The unemployment rate is extremely low right now (when compared to history). We aren’t concerned yet, but we are watching out for a sustained increase in the unemployment rate.
U.S. inflation is rising very slowly above 2%. Indicators suggest that inflation won’t deviate too far from 2.5% in 2018.
*Many investors expected inflation to “surge” in 2018. This is clearly not the case.
Initial Jobless Claims
Initial jobless claims continue to make new lows for this economic expansion. This is a long term bullish sign for the stock market because jobless claims tend to rise before a bear market and recession begins.
*Initial Jobless Claims are very low right now (historically speaking). We are not concerned yet, but we are watching out for any sustained and significant increase in Initial Jobless Claims.
Nonfarm payrolls have been trending sideways for the past few years. Nonfarm payrolls is not a leading indicator for the stock market or economy – it’s a coincident indicator. This indicator peaks when the stock market and economy peak.
ISM Manufacturing PMI
ISM Manufacturing PMI has fallen for 2 consecutive months. This is a weak point in the economy. It’s too early to make a judgement call right now – 2 months of data does not make a new trend. We are watching out for further deterioration in this economic data series.
Industrial Production Growth
Industrial Production Growth continues to trend higher. This contradicts the weakness in ISM Manufacturing.
Industrial Production growth (excluding Mining & Utilities) tends to trend downwards before a recession and bear market begins.
Small Business Optimism
The NFIB’s small business optimism index is flat. Historically this is as good as small business optimism gets. This isn’t a leading or lagging indicator for the economy and stock market. It doesn’t have much predictive power.
Total vehicle sales
Vehicle sales have been trending downwards a little over the past half year. Keep in mind that vehicle sales is an extremely early leading indicator for recessions and bear markets. Total Vehicle Sales can start to trend downwards years before a bear market and recession begins.
U.S. Consumer Sentiment continues to trend higher.
The University of Michigan’s consumer sentiment indicator is not a particularly useful indicator for the economy and stock market. Sometimes it leads the economy and stock market. Sometimes it lags.
Retail Sales Growth
Retail Sales growth is still trending upwards a little bit. This suggests that a bear market and recession are not imminent. Historically, Retail Sales growth trended downwards before a bear market and recession began.
New Home Sales and Housing Starts continue to trend upwards. This is a medium-long term bullish sign for the economy and stock market. Historically, New Home Sales and Housing Starts trended downwards before a recession and bear market began. These are leading indicators.
U.S. economic growth is solid, although there are a few small signs of weakness. This is not a concern yet because the data is improving overall. HOWEVER, we are watching for any signs of sustained weakness in the data because the next recession will lead to a bear market in stocks (e.g. 40%+ decline). The Medium-Long Term Model states that this bull market still has 1-2 years left.
*It’s not the month-to-month data that matters. It’s the overall trend in the data.