The Five Forecasters still favor the continuation of the current bull market and no recession. The Five Forecasters, which we first introduced in 2014, are five indicators that, collectively, have historically signaled the increasing fragility of the U.S. economy and a transition to the late stage of the economic cycle and an oncoming recession.
Currently, these indicators are generally sending mid-cycle signals (similar to our cycle clock from Outlook 2016). Three of the five indicators are flashing a warning signal and suggest the cycle may have moved past the midpoint, while two of them are still benign. Here we review these five indicators, which still signal that this bull market may continue and that the latest S&P 500 correction may stop short of a 20% decline.
Bear market declines of 20% or more for stocks are not always accompanied by a recession, although more often than not, that is the case. Accordingly, we believe these indicators can be used to give some advance warning of an impending bear market. The average S&P 500 decline in a bear market historically is about 33%, compared to the 12% peak-to-trough decline from the all-time high on May 21, 2015, through January 20, 2016.
In the Outlook for 2016, we highlight some areas where uncertainty or important changes may lead to opportunities as the year progresses, such as interest rates, energy, and emerging markets. For each of these areas, as well as for the volatile market environment as a whole, we share an overview of our playbook for added flexibility in 2016. Running through all of these playbooks are some basic themes:
- Patient doesn’t have to mean passive. Stay with your plan, but there
may still be times when it makes sense to lower a portfolio’s riskiness.
- Protect but don’t panic. Some protection can create flexibility.
– Pursue opportunities. Flexibility creates room to pursue opportunities.
With this more tactical approach, technical analysis can be a more important tool for gauging market behavior and can be useful both to help mitigate risks and take advantage of opportunities. Technicals have always been part of our process in analyzing market behavior. In more volatile markets, where fear can create sustained gaps between what’s going on in the markets and what’s going on in the economy and corporate America, the ability to measure market sentiment through technicals can become even more important.
In case you missed it, here is Michael’s radio interview regarding the recent Powerball Jackpot. What will happen to the lucky winner of the life-changing prize? Have past winners had their lives changed for the better? Michael gives his expertise below.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Once again, the precipitous decline in the value of the Chinese stock market has spilled over to the broader global financial markets. The value of the Shanghai Index declined almost 15% since the beginning of the year, or at least the beginning of our year. China’s social and economic life is geared around the lunar New Year, which will be celebrated on February 8, 2016. The New Year makes a big difference in China, both psychologically and in real economic activity. Workers in China have seven days off and many travel home to visit family. In one week, years of migration from rural areas to cities is reversed, at least temporarily.
Investors are revisiting issues last considered in August — primarily, the connection between China’s stock market and economy and the broader implications for the global economy. Our basic views on China remain consistent. China’s short-lived stock market bubble burst, but there is little connection between the market and the economy. China is undergoing a painful, but necessary, rebalancing of its economy away from strong government-led infrastructure and manufacturing-based development and toward a more consumer-led and service-based activity. We believe that China’s government still has the resources to smooth this transition. However, new risks are appearing. Many of China’s recent problems appear to be self-inflicted, caused by poorly designed or communicated government policies. China has taken steps to liberalize aspects of its financial markets without the intended result. We will detail some of these new policies and factors and how they may impact China, in addition to the rest of the world.
A number of key U.S. and global economic reports are due out this week (January 4 – 8, 2016), as investors return from the holiday break and refocus on many of the same issues that bedeviled the market in 2015, including the price of oil and the signal it is sending about the health of the global economy. As markets look ahead to the start of fourth quarter 2015 earnings reporting season, which won’t kick into high gear until late January 2016, the price of oil and its impact on business capital spending and manufacturing remain as key concerns.
The reports out this week on the manufacturing sector include:
- Markit Purchasing Managers’ Index (PMI) for manufacturing for December 2015, which was released as this commentary was being published
- Institute of Supply Management’s (ISM) Report on Business Manufacturing Index for December 2015, which was also released as this commentary was being published
- November 2015 factory shipments and orders report
- December 2015 employment report, and specifically the job count in the manufacturing sector