Talking Points – May 2019

May 29, 2019 – The Important Economic Indicator We Are Watching

When mainstream media and even financial media discuss the health of the economy they typically are referring only to the employment situation or GDP. Currently, employment remains very strong and GDP keeps growing at a modest, but positive rate; however, there are many other economic indicators. Among the most important is ISM.

This weeks chart demonstrates the correlation between ISM and earnings growth. If ISM declines too much it will negatively impact earnings, which ultimately can lead to recession, but sooner than that will typically lead to stock market weakness.

While the ISM has been declining recently, it is still above the key 50 level that indicates positive growth. The concern would be that the trade war forces company’s to slow down their spending and shift to a more conservative posture, which could negatively impact the economy. We will be monitoring the ISM as we move forward.

May 22, 2019 – Consumer Confidence and Market Tops

We are always on the lookout for ways to get an edge on sentiment. We have been monitoring research on the Consumer Confidence Index (CCI). Additionally, we have seen other data that indicates a high level in the CCI to be a contrarian negative for stocks.

Today’s charts confirm that in visual form. As we have seen in the last several major market tops, CCI does in fact peak and start to decline prior to stocks. Notably the CCI is still climbing today.

Source: Strategas

Of course no indicator is fail proof and there can be many corrections along the route to a major market top.

May 15, 2019 – Is the Correction Over?

Just over a week ago, the stock market was breaking out to an all-time high and we even heard mentions of a possible goldilocks environment. My how quickly things change, as the expected trade deal with China turned ugly. With stocks having suffered a short, but sharp decline it is natural to wonder if enough damage has been done.

Our first chart looks at the percentage of advancing stocks over a 10 day period. Often times when this number reaches a downside extreme, a low is in. It appears to be near that zone, but not an all clear signal.

Source: Strategas

Next, we look at the percent of stocks that are trading at a 20-day low. Again, the number is elevated, but not extreme.

Source: Strategas

Stocks have formed many low points after small corrections over the years, without reaching the extreme levels pointed out in these charts. That may be the case again, but with the abrupt change in trade deal news and the negative impact on earnings, we would have a greater degree of confidence if the above metrics reached past oversold levels, or of course if a trade deal is completed.

May 8, 2019 – Policy Uncertainty Can Lead to Opportunity

Last week ended with stocks at new highs and investors feeling positive; however, over the weekend the trade war with China reignited and stocks are incurring their first volatility in many weeks. 

However, from past policy uncertainty has come market opportunities. Our first chart shows a Global Policy Uncertainty Index. The second chart looks at returns going forward based on levels in that index. Historically higher uncertainty has resulted in higher forward returns.

Source: Strategas

No one can predict when, or even if a trade deal will be reached. That kind of uncertainty is what the market dislikes and a big reason for the pick up in volatility. In the past, such volatility was an opportunity. That doesn’t mean it will play out the same this time around. Therefore, we focus more on our disciplined process and risk management strategy.

May 1, 2019 – Themes That Could Drive the Economy and Stocks for Years

Generally, we want to own stocks that are trending higher instead of trying to be a hero and pick when some beaten down group has finally reached a low. More often than not, another low is around the corner. We would extend our belief in trend to broader investment themes. 

Today, we briefly look at some of the major themes that could have a major impact on both the economy and stocks for years to come. From various aspects of technology, to transportation, climate, communication and demographics, we believe that these are important concepts for investors to consider.

Source: Merrill Lynch

While still wanting to pay a fair price, we try and have exposure in as many of the most important themes as possible. Perhaps just as important, but sometimes overlooked, is how these major themes could negatively impact certain industries and companies.

What themes are you finding intriguing to invest in?

Source: Greg Towner, CFA, CMT