Indications of a Positive Stock Market Future
The stock market is forward looking. While the past can shape how we discount the future, stock valuations are theoretically the present values of future cash flows discounted back to today.
There are relationships between economic activity today and probable economic activity in the future. Rather than guess what is likely to happen in the future, disciplined investors use statistically relevant relationships between today’s events and probable future outcomes to make educated forecasts of what might happen next.
We have found the Leading Economic Index (LEI) and Treasury Yield Curve to be robust, reliable forward looking indicators of recessions. History tells us that extreme bear markets occur during recessionary times. Being able to forecast recessions is useful for avoiding major bear stock markets. This week, the LEI and Yield Curve are indicating a very low probability of recession anytime during the next six months. The LEI was updated late last week and has had three consecutive positive month-over-month gains of 0.6%. This is bullish for stocks.
While we have high confidence in the LEI and Yield Curve as standalone indicators, it is confidence boosting when other indicators point in the same direction. This week, we highlight the Chemical Activity Barometer (CAB) and the Pickup Truck Sales (PTS) Indicator. Chemicals and pickup trucks are closely associated with a significant amount of economic activity in the U.S.
The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), posted its strongest year-over-year gain in nearly seven years. The 5.5 percent increase over this time last year reflects elevated consumer and business confidence and an overall rising optimism in the U.S. economy.
Pickup trucks are often sold to small, independent business people. Many pickup trucks are used in the construction industry. In the past week, we saw the highest home builder sentiment in twelve years. The chart below shows pickup truck sales from 1980 through 2016.
On the chart above, recessions are marked with vertical dark grey bars. Before all recessions during this time period, pick-up truck sales either leveled off or declined. Today, pickup truck sales are showing a steady, positive upward trajectory. No sign of impending recession and stock market stress.
Positive indicators do not alleviate investors from day-to-day volatility caused by an uncertain world. This week, concerns about the probability of Trump’s lower taxes, scaled back Affordable Care Act and reduction of regulation agenda would become a reality caused the banking and healthcare sectors to pull-back especially hard relative to the broader indexes.
Reliable, time-tested indicators help keep emotions out of the investment decision process. Short-term volatility can cause investors to make emotional, sub-optimal investment decisions. Although the S&P 500 incurred its first greater than 1% daily decline this week since October 11, 2016 (roughly six months ago), our indicators remain bullish.
One of the keys to investing is sifting through all available information and sticking to a plan. Somehow, we need to control our emotions about something that is very important to each of us. We invite you to call or email anytime if you have questions about how we can help you with your wealth management. Please give us a call at (415) 249-6337 or email us at info@uscapitalwm.com to learn more.
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This commentary and a sampling of previous editions are available as PDFs:
3/24/2017: Indications of a Positive Stock Market Future
3/17/2017: Hallelujah, Reflation!
3/10/2017: Small Cap Stock Divergence
3/3/2017: Velocity Pivot Good for Stocks
2/24/2017: How Safe Are The Banks
2/17/2017: Climbing A Wall of Worry
2/10/2017: Value Shopper - Europe on Sale
2/3/2017: What, Me Worry
1/27/2017: Extraordinary Earnings Louder Than Trump
1/20/2017: It's Not All About Trump
12/30/2016: Predicting the Future -2017
12/2/2016: Trade What Is, Not What You Think It Should Be – 2017 Outlook
Pursuant to the provisions of Rule 206(4)-1 of the Investment Advisors Act of 1940, we advise all readers to recognize that they should not assume that recommendations made in the future will be profitable or will equal the performance of past recommendations. This publication is not a solicitation to buy or offer to sell any of the securities listed or reviewed herein. The contents of this letter have been compiled from original and published sources believed to be reliable, but are not guaranteed as to accuracy or completeness. Nicholas Atkeson and Andrew Houghton are also principals of US Capital Wealth Management, a registered investment advisor. Clients of US Capital Wealth Management and individuals associated with US Capital Wealth Management may have positions in and may from time to time make purchases or sales of securities mentioned herein.
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