The Key To High Returns: Ignoring All The Data

  • The economy and the stock market are two different entities, but the impact that one has on the other is extremely important.
  • The stock market has trended upward since its December lows.
  • The hard data shows slowdowns, consumer sentiment is waning, but the market continues higher.
  • The market trends to the upside over time, and getting exposure to the positive drift is beneficial for portfolios.

Economic reports have been delayed. The government exited a 35 day shutdown a few weeks ago, and are expected to enter another one February 15th if things don't get resolved. March 2nd is the final day to figure things out with China, or tariffs go up to 25%. To say that there is uncertainty would be an understatement.

We can look into the data to determine what has happened, and potentially what will happen. Most key metrics are contracting, and the impact of the tax cut is beginning to wear off. The market appears to be recovering from it's 2018 December fall, but indicators are pointing to an earnings recession and a dry-up of growth, domestically and internationally.

Economic Indicators: What are the Data Saying?

The US Leading Index is composed of housing permits, unemployment insurance claims, ISM data, and the spread between the 10-year and 3-month, among other leading variables for the economy. The rate is 0.98%, which is the lowest it has been since November 2009. The lower rate reflects a potential slowdown in growth for the US coincident index.

leading economic indicators

Source: FRED

Several models have also reflected this potential slowdown, with some factoring in the probability of a recession over the next 12 months. Nordea Bank found that there is a 49% likelihood of a recession in the next 12 months, based on the differential between expected consumer confidence and current conditions.

falling into a recession

Source:

The Number Most Discussed: Gross Domestic Product

GDP has been slowly contracting in growth over the past two quarters, but still remains positive on a year-over-year basis. But GDP as a standalone isn't always the most useful metric. It's also important to consider how the GDP relates to the deficit. For the next ten years, deficits are supposed to average 4.4% of GDP, which is more than 1.5x larger than the 50 year average of 2.9%. Revenue is expected to increase, representing 18% of GDP, but so are outlays, at 23% of GDP. There is a 4.7% gap between the incoming dollars and outgoing, which will further increase the deficit and raise debt.

deficits and gdp

Source:

But it's not just the US that is weighed down by debt, although the new $22 trillion metric is rather concerning. In Q3 2018, global non-financial corporate debt hit a record high of 92%, according to the IIF. A lot of this debt increase was driven the United States, but China has also taken out their fair share of credit. Both countries also have interest coverage ratios below optimal levels. Global debt has grown by $27 trillion since 2016, surpassing $244 trillion and 318% of GDP.

debt across entities

Source:

Fiscal Policy: No Benefit From Cutting Taxes

Corporations are not excluded from this debt phenomenon. Corporate debt has been increasing at unprecedented rates, with most companies leveraging themselves beyond the point of sustainability.

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Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can ...

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