Key Points

  • Putting more meat on the bones of my portion of our outlook summary released last week.

  • When it comes to the relationship between economic data and the stock market, “better or worse tends to matter more than good or bad.”

  • Bear markets and recessions are difficult to time accurately, but there are tried-and-true disciplines investors can adopt to weather any coming storms.

Early last week we published our collective 2019 outlook summary and today’s report will put some more visual meat on the bones of that summary.
We’ve been having fun with cartoons over the past few years; all created by Schwab’s talented graphics guru Charlos Gary. Mine for the outlook summary attempted to have fun with the notion that some of the factors which have kept animal spirits in high form over the past couple of years are fading or have left the building altogether.

We have been in a unique era over the past couple of years with a yawning gap between so-called “soft” economic data (survey/confidence-based) and “hard” economic data (actual measures of growth/activity); with the former lifted by both business and consumer confidence. It’s this confidence that’s now being tested, courtesy of the trade war, tighter financial conditions, domestic/global political upheaval, and slowing global growth (among others). You can see a chart of financial conditions below; which you’ll note have been tightening sharply since the beginning of 2018 (decidedly different from the loosening that occurred during the first two years of the Fed’s rate hike cycle, which began in late-2015).

Rapidly Tightening Financial Conditions


Source: Charles Schwab, Bloomberg, as of December 14, 2018. An increase in the Goldman Sachs U.S. Financial Conditions Index indicates tightening of financial conditions and a decrease indicates easing.

Better or worse…

Most of the deterioration in U.S. economic data has been subtle and/or somewhat under the surface. But as I always like to highlight—especially at possible inflection points in the cycle—when it comes to the relationship between economic data and the stock market, “better or worse tends to matter more than good or bad.” Assuming a recession does not begin until after next July, at that point, this expansion will be 10 years, and the longest in the post WWII-era.

Leading U.S. economic indicators continue to rise (as of this writing, which pre-dates this coming Thursday’s release of The Conference Board’s Leading Economic Index); but there has been notable “second derivative” (rate of change) deterioration in a few key leading sub-indicators. These include the stock market, building permits, the average workweek, the yield spread and unemployment claims (notwithstanding last week’s recovery).