World’s Best Economic Indicator Flashing Warning Signs

Canadian and American stocks have roared back after the December disaster on Bay Street and Wall Street. Despite the bullish sentiment though, some analysts think the S&P 500 and TSX will test the Christmas Eve lows of 2018. Does this mean investors should take a wait and see approach or should they embrace the stock market volatility and look for stock market bargains?

Is Another Slowdown Coming?

The October market-wide meltdown was bad, but December was even worst for North American equities. Between December 1 and 24, the S&P 500 tumbled 15.7%. Over the same timeframe, the TSX lost 9.3% of its value. It was a Christmas miracle though. In the days following the holidays the markets rebounded. As of this writing, the S&P 500 is up 10.4%, the TSX is up 9.2%, the Nasdaq has advanced 12.2%, and the Dow Jones Industrial Average has increased 10.10%. All is not as it appears though. One of the main reasons why the markets rebounded was because the U.S. Federal Reserve hinted it would be holding its key lending rate steady. Federal Reserve chair Jerome Powell said policymakers would “be patient” on rates given weak inflation. It is widely expected that the Federal Reserve, which will be holding its first monetary policy of 2019 at the end of January, will keep the rate at the current range of 2.25% to 2.5%. The Fed raised rates four times in 2018, far too many times as far as President Trump is concerned. Many economists believe the Federal Reserve will raise rates two more times in 2019. While all of that sounds encouraging, it’s important to remember that even after rebounding off of recent lows, the TSX, S&P 500, Nasdaq, Dow Jones, and NYSE, all remain in correction territory, which is defined as a decline of 10% or more from recent highs. At first glance, the broader stock markets look solid, but concerns about shrinking fourth quarter earnings and growing economic concerns mean equities could revisit and even surpass December lows. How do we know? The stock market is the best economic indicator, and it’s flashing warning signs. The stock market, the TSX, and S&P 500 (etc.) are forward looking indicators, and over the last three to six months, the markets have been volatile. Should earnings season be discouraging or hard economic data from the U.S. (the world’s biggest economy), China (second biggest economy), and Europe (largest economic region) worsen, market sentiment could turn quickly and either revisit or surpass December lows. This could translate into an earnings and economic recession; the former hasn’t happened since 2016 and the latter, since 2008. It isn’t out of the question; 60% of global fund managers expect global growth to slow over the next 12 months. That’s the most pessimistic outlook on the global economy since July 2008.

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