Outlook For Stocks - Friday, June 1

Thoughts

1. Corporate profits continue to trend higher. A medium-term bullish sign for the stock market.
2. Initial Claims & Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
3. Trump’s tariffs aren’t medium-long term bearish for the stock market and economy.

1 am: Corporate profits continue to trend higher. A medium-term bullish sign for the stock market.

Corporate profits are still trending higher, even after adjusting for inflation.

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This is a medium-term bearish sign for the stock market. Historically, corporate profits (inflation-adjusted) tend to go down for a few quarters before an equities bear market or “significant correction” begins.

1 am: Initial Claims & Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.

The latest reading for Initial Claims and Continued claims went down from the previous week’s reading.

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The key point is that Initial Claims and Continued Claims are still trending lower right now.

*Initial Claims & Continued Claims lead the economy and stock market. Historically, they trended higher before a bear market in stocks started (see study).

We use Initial Claims data in these 2 trading models (here and here). These 2 trading models state that you should be long stocks right now because Initial Claims data is still trending downwards.

This suggests that the bull market in stocks is not over because Initial Claims & Continued Claims have not trended higher yet. However, we are watching out for any SUSTAINED increase in this data series because Initial Claims & Continued Claims are very low right now (historically speaking). We are trying to catch the bull market’s top because the bull market most likely only has 1-2 years left.

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(Click on image to enlarge)

1 am: Trump’s tariffs aren’t medium-long term bearish for the stock market and economy.

You’ve probably heard about Trump’s steel and aluminum tariffs on the EU and Canada by now.

As always, perspective is everything. These tariffs will have a minimal impact on the stock market and economy (in percentage terms). The impact on inflation will also be small – a 0.01% boost to inflation (hardly a “surge” in inflation). From Goldman Sachs:

“The incremental inflation effect of these tariffs should be small. We estimate that adding Canada, Mexico, and the EU to the countries facing a tariff of 25% on steel and 10% on aluminum could boost core PCE by roughly 1bp.

CNBC posted a pretty good chart demonstrating which states will be hit by the EU’s retaliatory targets. While the numbers look big (absolute #), they are very small as a percent of the U.S. economy. The damage is minimal because U.S. GDP is almost $19 trillion.

Outlook

Here’s what I think will happen based on my discretionary outlook.

1. The S&P has made a 6%+ “small correction”. This will not turn into a “significant correction”.
2. 2018 will trend higher but will also be a choppy year.
3. The S&P 500 has approximately 1-2 years left in this bull market.