The Stock Market Is Still Thinking Positively

The economic news has turned mixed lately, with several indicators flashing fresh signs of stress. The sharp downshift in job creation last month is surely the most-distressing evidence that the economy has taken a turn for the worse. But it’s too soon to give up on expecting the expansion, which is two years old next month, to muddle through. True, growth has clearly slowed, but that’s not yet a guarantee that a new recession is near. Indeed, there are still some encouraging signs to review. Let’s start by stepping back and considering a broad spectrum of the economic trends.

April is the latest month with all the major economic reports published, as shown in the table below. The red ink in the year-over-year column is discouraging, but most of the weakness here is in housing. That’s not good, but it’s not new. The economy has managed to grow despite the ongoing housing crisis. There’s some question if housing is headed for a new leg down, however. If so, that would present a new challenge for the economy at a precarious moment in the business cycle. But if real estate simply manages to remain flat for the year ahead, the pressure on the macro trend will lighten. Alternatively, a new round of trouble in housing would weigh heavily on the prospects for growth. The next several months are likely to be crucial on deciding which future awaits.

Meantime, the fact that the broad economic trend is still favorable on a year-over-year basis suggests that there’s still a fair degree of forward momentum. Our broad measure of economic conditions—the CS Composite Economic Index, an equally weighted mix of 18 indicators—rose 1% for the year through April. Unfortunately, that’s the slowest pace of growth in more than a year. Even worse, our leading indicator of economic metrics is in similar straits. As of April, the trend was still positive, but we’re getting uncomfortably close to zero.

The early signs in the May economic news aren’t encouraging, and so the odds for a reprieve don’t look promising once the full boat of new numbers arrive in the weeks ahead.

On the other hand, the stock market, everyone’s favorite discounting machine, hasn’t capitulated. By that we mean that the rolling 12-month percentage change in the S&P 500 is still firmly positive. As of last week, the S&P is up roughly 20% over the past year on a price basis. That’s encouraging if you consider that every recession in the last 50 years has been accompanied, if not preceded by a year-over-year loss in the S&P 500.

But it’s also true that the crowd is rattled, and for more than trivial reasons. As we write this morning the S&P 500 is down by roughly 0.3%. True, it would take a sustained run of selling in the days ahead to turn the positive annual change for the S&P to red. If that happens, it would be a worrisome sign for sentiment and the economic outlook. But we’re not there yet, offering at least one reason for thinking positively.

About James Picerno 894 Articles

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.

Visit: The Capital Spectator

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