Is this the beginning of the next recession?
The short answer: No – Not yet.
For now, the losses in the stock market are looking like our typical “one to two time per year pull-back” that we never enjoy going through but statistically these happen on a regular basis.
The good news is, the fundamentals of our market are still good from what we can see so far.
However, 3rd quarter earnings are going to start getting released soon and IF we have a lot of companies miss their revenue/profit forecasts, that’s going to be a big sign of weakness in the market from both a technical and fundamental standpoint.
While missed revenue targets on their own are not enough to create a recession or long term pull back lasting more than 12 months, it will definitely cause more heartache in the market and more short-term losses.
For now, we are seeing more positive signs than negative ones – even though the last couple of weeks have experienced some temporary losses.
We recommend you stay the course on this one. No Traffic Light signals have hit but we’ll keep you posted when they do.
While it might be tempting to sell right now – I urge you to resist the temptation.
So What’s Up With This Market?
There’s a lot of factors that go into how the market acts, but for Wednesday and Thursday – the short answer is “Panic”. The slightly longer answer is that we have a lot of investors (mostly institutional investors) who are getting anxious about the potential that corporate earnings aren’t going to meet expectations.
Third Quarter earnings reporting season is kicking off next week and will be in full swing by the end of the month, so time will tell if their fears are supported and we continue to see a selloff in the market, or if earnings come in strong and we enjoy a nice little comeback in the market before the holiday season.
The truth is, the fundamentals of the market are still looking good. While we do have a few areas of the market that we’ve placed on our watch list, most of the 12 economic indicators we follow are not showing signs of concern yet.
Markets Move In Cycles
Before I dive into our 12 Market Health Points to give you a high level view of what’s going on, I’d like to remind you that markets move in cycles – both short-term and long-term cycles.
Most of the time, the short-term cycles are hard to predict and manage because they move too quickly (think in terms of days or up to a few months). The current cycle we’re in right now as well as the losses we experienced this past February would be considered short-term cycles.
Trying to over-manage short-term cycles is a fool’s game.
The long-term cycles on the other hand are the ones we need to be sure to manage correctly and thankfully are much easier to see. Long-term cycles take months to develop, not days or weeks, and they take years sometimes to recover from (think Tech Bust of 2001-2002 and Financial Crisis of 2008 – 2009). Those two cycles took more than 4 or 5 years to recover from for most people.
I can tell you with confidence that we aren’t there yet. We’re getting closer to the end of our current bull run cycle and I’ll keep you in the loop when it does happen.
12 Market Health Points
You can think of these 12 Health Points like a breaker panel in your house. In fact, one of the research firms we work with refers to these as an “Economic Breaker Panel”.1 At Epic, we’ve included our Traffic Light Portfolio™ Indicators as well to round out the overall analysis.
As you can see from the table above, there’s A LOT of green still. That means we’re in pretty good shape economically.
While I don’t want to bore you going through each of these indicators and how they work, I will point out a few things that are of particular interest;
2-Year VS. 10-Year Treasury Inversion
The 2-year VS. 10-year treasury indicator actually improved this month with the most recent rate increases by the Federal Reserve. If you’re concerned about a recession, this is one of the most important indicators you want to follow because it has successfully predicted 5 out of the last 5 recessions the United States Economy has experienced since the 1980’s. That’s REALLY good odds for predicting the next one too.
The reason I like this indicator so much is because it acts as an early warning sign that the economy is slowing down. Meaning – we get lots of time to prepare for the downturn before it hits us.
It’s like being able to watch the satellite footage of hurricane for a week or two before it hits land. You get several days to prepare, board up your windows, and get out of town.
That’s what this indicator does for us economically and based on the last interest rate hike, we saw this indicator improve – which means “the big drop” that’s likely to last a for more than 12 months and cause severe losses isn’t going to be for a while longer still.
Light Truck Sales
The reason this indicator is yellow is because for the last 3 months, we’ve actually seen a red light on this one. Truck sales saw a notable increase last month. It’s only recently moved back to positive territory, so we still have it on our warning list. Since lots of small businesses use light trucks in their course of business, it’s a pretty good sign when we see a steady flow of trucks getting purchased. If we continue to see an uptrend the next few months then it will be a positive sign for the economy.
Traffic Lights Portfolio™ indicators for the S&P 500
The last indicator we’ll look at today is the Traffic Light Portfolio™ signals on the S&P 500. We use these signals to make the final trading decisions on the accounts we’re managing. Just like we experienced February – May of this year, the S&P 500 broke through the Traffic Light support line (yesterday) but we’re thankfully finding some support today – which is a really good sign.
You can see in the chart below (printed at 12:19 PM PST 10/12/2018) that the market today is sitting right above the 200-day support line (smooth red line in the top chart). And the MACD (bottom chart) is still slightly positive showing the black line above the red line.
These are slower indicators to trigger because we really only want to take action on them at the beginning or end of the month and not in the middle of the month. So for now, we’re concerned a little but only on a short-term basis. We’ll keep an eye on it till the end of the month and let you know if our outlook changes at that point.