This week has seen risk assets bounce back following dovish comments from the Fed’s Jerome Powell on Tuesday, issued in direct response to lingering concerns over US President Trump’s trade tariffs being imposed on imports from China and Mexico. At the time of writing, the S&P 500 ETF (SPY) is up almost 3.5% ahead of today’s jobs data which feature the closely watched (rather pointlessly) non-farm payrolls report. In this week’s Trading Club video we assessed the current picture for global equities along with other setups in currencies and commodities, and also featured a special in-depth analysis of our US business cycle indicators. Trading Club members have access to my full analysis at the Trading Club right now, but I will share a few of the charts for you here...
Here you can see the criteria we assess to generate our total score for our Business Cycle Checklist. It’s currently at +6, as it has been for some time, signalling expansion in the US economy (a positive thing for stocks and other positively correlated assets). However, beneath the surface things are beginning to shift, as I discussed in this week's video...
The Conference Board's Leading Economic Indicator (LEI) Index appears to have peaked in 2018. Although the level remains positive (green), indicating expansion, the momentum has been negative for several months now - hence the 'half mark’ positive on our Checklist.
Next up, the US ISM Manufacturing survey, which fell hard this month. Similar to the LEI Index above, it remains above 50 (expansion) but has negative momentum. More worryingly still, the China PMI survey, which tends to lead the US ISM report, has crossed below 50 (signalling contraction in the business cycle). I wouldn’t be surprised to see the ISM below 50 in the coming months, which would of course be negative...
Here you can see the YoY% change in the ISM (top, grey) and the New Orders - Inventories spread below (green / red). The former is negative, though the latter is marginally positive (but looking weak)...
Housing data, represented by building permits below, has also looked weak in recent months, but showed improvement in the most recent reading. However, the up trend appears to be showing signs of exhaustion and close to reversing downwards if the improvement in the data is not sustained in the next few months.
The labour market has been one area of clear strength in the US economy, at least judging by the headline data. Should this begin turn (hence why today’s jobs report is all the more important) then things would begin to look troublesome for the overall health of the US economy.
Consumption, represented by the PCE Services index below appears to be ok, with no real reason to be especially bearish (or bullish for that matter). Nothing to write home about...
Earnings estimates (grey) have failed to grow this year, which is one of the reasons why the S&P 500 has yet to register a new high in price (save for a couple of daily closes marginally above the previous peak prior to the sell off last month).
Finally, and perhaps most topical chart this month, is the yield curve. Depending on your preferred version (swap, forward, spot and term) the yield curve is basically at the point of inversion, which historically has signalled a recession coming in the next year or so. But the most important thing that I’m looking at on this chart is the top panel, which has been pricing a rate cut (and probably a recession) all year. Whether it leads to a recession will depend on the other data in our Checklist, but for now Chairman Powell’s acknowledgement that a rate cut may be on the cards for the US in the near future seems as though it should be believed, and not dismissed as 'jaw boning’ the market.
Time will tell how this all plays out, but rest assured, with our Checklist process you will be ahead of the game and better informed than many investors who do not employ the same tools that we do as professional fund managers (and honest educators!).
If you would like to learn more please join us as a member of our Trading Club or learn from Lex with our Million Dollar Traders online course!
Have a great weekend,
James Helliwell | Chief Investment Strategist
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