Economic Indicators and the Market

By Dean Barber

July 11, 2019

This month I’m going to bring you up to date for the quarter. I’ll discuss economic indicators like interest rates so far this quarter, year-to-date, and over the last 12 months. We’ll also take a look at the markets over the second quarter and cover a little about precious metals, consumer confidence, and the PMI. There is a lot of data we’re going to cover today. I’m going to try to do it in a short period of time and keep it as high level as possible so you can understand what I’m talking about. I’m writing this on July 9, 2019, so the data will be through then.

Interest Rates and the Inverted Yield Curve

Alright, let’s start with one of our key economic indicators; the yield spread between the 10 Year Treasury and the Three-Month Treasury. Back in April, I discussed how the 10-Year Treasury and the Three-Month Treasury inverted in March.

Economic Indicators and the Market - 10 Year v 3 Month Treasury YTD

Figure 1 Source:

In Figure 1, you see the top blue line dropping below the orange line. That means the orange line, which is the Three-Month Treasury rate was yielding more for a little period of time where the 10 Year Treasury. Every time this has happened since 1950, there’s been a recession follow within the next five to 24 months. As you can see, the initial inversion ended after a short time. However, in May, an inversion occurred again. Today, we’re nearly at the widest yield spread we’ve seen, barring the slightly higher yield spread back in early June.

The blue “zero line” on the bottom of Figure 1 is showing us the times when the Three-Month Treasury began yielding higher than the 10 Year Treasury. We can see that spread increase to 21 basis points, where the Three-Month Treasury is yielding higher than the 10 Year Treasury.

Once again, it doesn’t mean there’s going to be a recession tomorrow, and there’s no guarantee a recession is coming. However, since 1957, each time this inversion has occurred, there has been a recession follow within the next five to 24 months. Therefore, we definitely have our eye on economic indicators like these.

Stock Market Performance

Economic Indicators and the Market - Q2 2019 DJI S&P 500 NASDQ

Figure 2 Source:

In Figure 2, we’re looking at the stock market for the second quarter. We can see that April was a good month, May took all that away and then some, and then June basically got back most of what May took away. So, we wind up the quarter, not great. I mean, there’s a couple of percents there on the S&P 500 and the NASDAQ. The Dow Jones Industrial Average is up about 1.3%. So we did have a nice recovery in the month of June which brought back most of May’s losses.

So far now in July, we’ve seen a little bit of what we got in June has been taken away. If I look at what most of the big banks’ big brokerage firms are forecasting, slower growth is ahead although most of them are still pretty bullish on US equities.

Economic Indicators vs. the Market

Economic Indicators and the Market - Q2 Consumer Confidence SP PMI

Figure 3 Source:

Let’s take a look at what’s going on with consumer confidence and the Purchasing Manager’s Index, the PMI, the orange line over the second quarter in Figure 3. You can see in May and in June, we continue to see the PMI continue to fall. That’s a sign of what is going on in industrial production. What we’re seeing is a decline showing us a slowing trend in the economy. Which coincides with another one of our economic indicators, the inversion on Three-Month Treasury and the 10 Year Treasury.

PMI, Consumer Confidence, and the S&P 500

We also saw consumer confidence (Figure 3, red line) start to dip. I laid the S&P 500 (Figure 3 blue line) chart over the top so we can see how there doesn’t seem to be any correlation between what the stock market’s doing and what’s happening with the PMI. That’s exacerbated greater below in Figure 4 show the PMI and consumer confidence in relation to the S&P 500 over the last 12 months. Our economic indicators are not in step with market performance.

Economic Indicators and the Market - 12 Months Consumer Confidence SP PMI

Figure 4 Source:

You can see the stock market was following along with the PMI. The PMI has continued to decline since January, and yet the stock market has taken off like a rocket ship. We’re seeing stock prices rise but also see economic indicators telling us things are slowing down. One of two things has to happen. We either see the economic indicators and the economic activity come up and meet what the markets are doing, or the markets will come back down to meet what the economy is doing.

Nobody has a crystal ball. We don’t know exactly what’s going to happen. But we know this divergence we’re seeing isn’t something that is normal. It’s something we have to pay very, very close attention to.

Fear Assets

Economic Indicators and the Market - Q2 Precious Metals

Figure 5 Source:

One last thing here as we wrap this up (and) I want to talk to you a little bit about what I’ll call the “fear assets”. The assets which do well in times of economic fear or market fear and those are precious metals. As you can see in Figure 5, showing May and June, and even a little bit to July, gold prices and silver prices have started to increase quite a bit. The only thing that really hasn’t gone up is the copper. This increase in gold and silver prices we’ve seen over the last couple of months is really indicative of consumer confidence falling. It’s the PMI and the fear of an economic recession coming somewhere down the pike.

Talk to Your Advisor, Reach Out to Us

Again, none of these things occur on a calendar, and nobody tells us exactly when they’re going to occur. What I want to try to do is just bring you the information and let you know that we’re on top of it. We’re paying attention. As we design your portfolios, these are factors we look at. We understand, most of our clients are like you they’re either retired or they’re going to retire in the next few years. We build your financial plan to a point where we think your asset allocation is the way it needs to be.

As I do every single month, I want to encourage you to keep the dialogue open with your financial advisor. Talk to them about your current asset allocation. Talk to them about what we covered today. Make sure that you understand what we’re doing, why we’re doing it, and how it fits into your overall financial plan.

With that, I hope you’re having a wonderful summer and I’ll be back with you in just about three weeks. And as always you’re looking for a second opinion or would like to stress-test your portfolio for the future, schedule a complimentary consultation below or give us a call anytime at 913-393-1000.

Dean Barber
Founder & CEO

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