Refuting A Bearish Argument: The Economy Is Accelerating

Record Highs In Tech, Small Caps, And Microcaps

I have been very bullish on stocks recently which has been the correct position to take as the S&P 500 has broken out of its recent tight range. It was up 0.07% on Tuesday. Tuesday was a microcosm of the recent action since the S&P 500 was barely up while the Nasdaq and the Russell 2000 were up 0.41% and 0.68% respectively. The Russell 2000 is now up 8.41% year to date. The Nasdaq is up 10.64% year to date. The S&P 500 is only up 2.81% year to date. The microcaps, the small caps, the Nasdaq, and tech are all at record highs. This means the breadth of the market is strong, indicating the S&P 500 should make a new record high itself. I will claim victory on my bullish call after it does.

Since tech is leading the market higher, let’s review the chart below which shows the correlation between the tech sector’s earnings growth and the overall market’s earnings growth. As you can see, generally when there’s a cyclical improvement, the tech sector’s EPS growth outperforms the overall market. This explains the sector’s current outperformance. It’s great news to see the market leaders, leading us to record highs.

(Click on image to enlarge)

Let’s Here The Bearish Case

I have been bullish on the economy partially because of the weekly ECRI index. As you can see, its bullishness in early 2018 correctly predicted the great Q2 GDP growth that the economy is on pace to achieve. The chart below shows after a few weeks of acceleration in early May, the leading index has decelerated again. Last week it fell from 3.5% growth to 3%.

Interestingly, even though I’ve used the ECRI data as justification for my bullishness, ECRI is actually bearish on the economy which I’d argue is the wrong position since GDP growth is expected to be 3.7% in Q2 and earnings guidance updates are better than average. ECRI hasn’t changed its bearishness since late 2017 when it went correctly bearish as Q1 saw a decline in GDP growth. I think the best time to review bearish opinions is when indexes are hitting record highs because it provides a counter to the bullish consensus.

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