Economic Outlook Revisited
A peak in earnings growth doesn’t mean you should sell stocks. Earnings revisions give an upper hand in deciphering the results of each earnings season. The question for the intermediate term is if there are enough catalysts to bring 2019 earnings growth lower, eventually leading to a net decline and a bear market. The Venn diagram below gives us a great summary of the structural and cyclical changes to the market/economy which can help us figure out if a recession is coming after this recent economic boost brought about by the tax cuts. It’s too basic to just look at the yield curve and say there will be a recession in 2020 because the curve will invert in the next few months. More analysis needs to be done.
Emerging Market Risk Is Hot
As you can see, there are two categories for each indicator: cyclical and structural (the middle grouping includes both). In the cyclical grouping, emerging markets are considered hot and the risk is increasing. With the rising dollar and the Fed rate hikes, many emerging markets are feeling the pain as their stock markets and currencies are declining. Some countries such as Brazil are seeing political volatility. India is an outlier which is improving. China is the elephant in the room as growth is decelerating after the quick bump up in in Q1. The chart below compares the 2018 emerging market volatility and economic weakness to the 2015 correction and weakness. As you can see, the 2018 declines are small compared to 2015, potentially signaling more problems are coming.
Oil Considered A Hot Indicator
In this chart, oil is a hot indicator and is stable. It’s very tough to say if oil is really stable because the price is so volatile. I don’t think oil is hot because fracking production limits the upside. Oil isn’t even in the triple digits like it was earlier in the cycle and the previous one. Furthermore, the oil market hurt the economy when it crashed from 2014-2016, not when it was high. It’s tough to categorize oil as hot or neutral because price increases hurt the consumer, but not enough to cause a recession. I think it’s somewhere in between those two options which would be light red.
