As I flagged last week we had these out yesterday and as forecasters had predicted the headline rate of unemployment came back down this month. In the event this was by more than expected with the headline number coming in at 3.8% rather than the 3.9% forecast by the consensus. This is good news in so far as it take the rate back below its moving average and means that for now we can ignore the signal from the market timing indicators again.
The headline jobs numbers themselves and signs of faster rising wages did seem to spook investors a little, although I note the three month average job creation still looks fine. As with the headline rate it may well be that the actual job numbers have been distorted in the last couple of months by the US Government shut down too.
Thus as it stands it still looks as though the US economy is going along reasonably well in the short term given the above and the ISM indices still being well above 50 suggests that no US recession is imminent - famous last words! I also wonder whether we could still see the economy moving ahead for a lot longer yet, given what happened in the last cycle. Indeed the 2000/2002 downturn doesn't even show up in these annual US GDP numbers (shown below), although it was generally categorised as a recession as far as I remember, probably due to the at least two consecutive quarters of negative growth definition.
So may be we could see something similar this time with a mid cycle slowdown causing a valuation driven correction followed by more Fed easing and a resumption of the bullish trend, perhaps? The reason I say this is based on some work on cycles that I read a while back in Money Week which I made a point of keeping as it tied into the property cycle work I have covered in the past in the book by Fred Harrison and how this drives the economy too.
I reproduce the Money Week article below at the end of this piece, so take a look and see what you think, as given when it was written, the calls it made have been remarkably accurate up to now. The next stage it foresaw was a mid cycle slowdown / recession around 2019/20 followed by the rest of the bullish cycle up to 2025/2026 and with the FTSE up to 12,000 by then, happy days.
Finally, as a largely UK investor (yes I m prone to home investor bias) I think we are slightly better placed in terms of valuations, although that may just reflect the heavy weighting we have in mature slow growth / low return industries such as Banking, Mining & Oil.
Aside from this though there are always stock picking opportunities out there which you should probably focus on rather than indices, unless your an index investor. So if you are looking for more stock ideas or inspiration for that then don't forget you can find hundreds of good quality growing dividend stock ideas in the Compound Income Scores.
..or the latest update to the Monthly timing indicators for the UK equity market. At the end of November most of the main indices (based on their total returns indices) were still around 5% above their 10 month moving averages and therefore still indicating a bullish trend. The Mid 250, in a turnaround from the last few years, continues to be the only laggard by being only 3% or so above its moving average as it continues to suffer something of a post Brexit hangover.
Meanwhile over in the US, the Unemployment rate, the other recession indicator that I'm keeping an eye on has spiked down to 4.6% taking it below its moving average again. This is supportive in this case as we are looking for a decisive break of this above its 12 month moving average to indicate the risk of a coming recession in the US which would then likely affect UK and other stock markets negatively.
This follows on from the bullish moves in the US stock market which has been prompted by the Trump election victory and hopes of a fiscally led reflation. In addition to the stronger employment picture other US statistics have shown stronger wage growth, consumer confidence and exports which seem likely to lead to upgrades to Q3 GDP to over 3%, which would be the fastest rate in over 2 years. So if anything the US economy seems to be going from stumbling along to a bit more strength in the short term with hopes of more growth and inflation next year, as is being discounted by moves in bond and equity markets - if Trump delivers on his manifesto promises. This is by no means guaranteed though as possibly indicated by this article. It does also mean the the long awaited Federal reserve rate rise is now almost certain this month with possibly more to come next year.
Despite all the bullishness surround the election of Donald Trump I did see one possibly spurious correlation or statistic that someone came up with regarding the election of a President after a two term president. In this piece that appeared on Zerohedge and noted that since 1910, the US economy is either in recession or enters a recession within twelve months in every single instance at the end of a two-term presidency… effecting a 100% chance of recession for the new President.
So that might indicate that things could be less bullish than the current economic news and market moves suggest, but given the limited data points etc. I'm not too sure about this indicator. What was of more interest perhaps though was an interesting video from the author of the original piece Raoul Paul, a Hedge fund manager, on his thoughts about using cycles to predict economies, stock markets, interest rates and commodities. Sounds too good to be true I know, but there is some good stuff in here and well worth 40 minutes of your time if you can spare it. It also reminded me about the usefulness of the ISM index as a predictor of recessions with associated probabilities so I'll be adding that to the list of things on my recession watchlist going forwards.
If you want to learn more about that and his thoughts on cycles you can either view the video in the original piece above or in the video below. Finally a hat tip to the excellent John Mauldin and his useful weekly Thoughts from the front line which is what put me onto these pieces in his recent post titled - What Should Trump Do? This is a free newsletter which is well worth signing up for if you have not already done so.
So there you go none of the indicators discussed above, apart from the questionable President following a two term one, suggest an imminent recession in the US, so for now I'll continue to ride the bull until such time as these indicators signal that there may be trouble ahead. All that leaves me is to wish you Happy investing and a Merry Christmas just in case I don't get around to posting again before then.
Thought it was about time I put pixels to screen and share some thoughts on what's been going on in the world recently. Well after another shock poll result we are looking forward to seeing the new oldest ever President in the White House next year. Now this has not stopped the market reacting in an unexpected fashion to this with the initial predicted plunge being replaced by all major US indices now soaring to new all time highs. I certainly can't recall any pundits predicting that, which just goes to show the perils of listening to pundits and forecasting in general.
Talking of forecasts we had the Autumn statement from the new Chancellor of the Exchequer in the UK this week with all its details and forecasts extending out to 2020 and beyond. Within this of course there were some downgrades to the previous long term forecasts which were put out just nine months earlier in the budget. Of course the blame for this is being laid firmly at the door of Brexit, but I also note that the recession for next year that was forecast by the remain campaigners has now mysteriously failed to materialise so far and in the forecasts too. So again this goes to emphasise the perils of forecasting and indeed relying too much on forecasts as these may be wildly inaccurate and subject to revisions. Therefore I'm not getting too concerned about or depressed by the pessimistic outpourings from the Institute of Fiscal Studies about real incomes stagnating for the next few years, although who know they could be right?
Having said that though markets are obviously taking a view on some of these changing trends as President Trump signals a fiscal reflation with tax cuts and a ramp up in spending planned. It is possible that this may lead to a decline in the influence of the Central Banks perhaps, but does seem to make it almost certain that we finally see another rate rise in the US next month. investors nevertheless seem to expect this fiscal reflation to boost to the economy and have therefore rotated out of bonds and into equities causing the moves we have seen in equities and a rise in bond yields. Whether this represents the start of an overdue normalisation of interest rates with higher inflation remains to be seen, but it does also suggest that markets also see less chance of a US recession next year - which is a good thing for equity investors. Similarly with the seeming absence of a recession in official forecast in the UK it seems that this cycle and the on going bull market might just be extended further into next year. This view is also being supported by the on going strength in the underlying equity indices and the recent further tick down in the US employment rate last month.
It has also meant that within the stock that we have seen a rotation from expensive, quality, defensive companies and bond proxies like Utilities, into growth and cyclical plays which will benefit from stronger growth. If the reflation view continues to prevail and the extra spending actually brings a boost to growth then some of these moves may prove to be justified and sustainable and indeed could have further to run. So if you share the view that this spending will help to boost the economy then more cyclical sectors may be a good hunting ground for cheap stocks especially if they have not moved significantly already.
On the other hand though some quality and defensive names have sold off quite aggressively and are therefore now offering better, if not outstanding value. These moves may therefore provides some opportunities to pick up some quality income / growth stocks for the long term at more reasonable prices, which may not be a bad idea if you think the boost from the increased spending will not be that great or long lasting given that it will come at the expense or further rises in debt. Personally I'm more interested in looking at the latter rather than chasing cyclical which will no doubt let you down again at some point come the next downturn.
As ever time will tell on the success or otherwise of Trump's policies and the UK's exit from the EU, but as ever its probably best to focussing on the underlying fundamentals of the shares you are interested in and not getting too worried or excited about all the economic news and views and the daily gyrations in the stock market.
Just another quick update on the outlook for the Us economy. Sorry to return to this again but I think this is important as what happens in the US pretty much drives everything else in the investing world.
Just read a very detailed and interesting / worrying piece from the always thoughtful Ambrose Evans Pritchard. Apologies if you have read it already but if not I would urge you to take a look at it here and think about how your portfolio might fare if we do see a US recession next year.
Came across a great post today which I thought I'd share as it helps to explain why we are seeing such a sluggish recovery. It also touches on momentum and trend following strategies which is also relevant given what the timing indicators and the US recession indicator have been doing. The image (click to enlarge) below comes from the post as does
the one below. If you want to read Debt, here there and everywhere at Value Walk then click here. It also touches on the outlook for returns in the medium to long term - 5 to 10 years - given where valuations are, but acknowledges that these may not be good predictors of returns in the short term. You can also read the authors thoughts on this here.
Any way enjoy - if that's the right word, don't get carried away out there while the trend is your friend for now & keep your tin hat close to hand as I think you might need it soon.