As we expected in last week’s market outlook, the U.S. stock market has pulled back after a hard bounce. The S&P 500 has now retraced more than 61.8% of its gains.
The economy’s fundamentals determine the stock market’s medium-long term outlook. Technicals determine the stock market’s short-medium term outlook. Here’s why:
*At this point in the late-cycle bull market, the medium term and long term have become one and the same.
We focus on the medium and long term. Let’s go from the long term, to the medium term, to the short term.
Long Term
Our long term outlook remains bullish. This bull market will probably last until Q2 2019, after which a bear market will ensue. (This date is a moving target and will be adjusted as new data becomes available).
The economy and the stock market move in the same direction in the long term. Hence, leading economic indicators are also long term leading stock market indicators.
Most leading indicators are still improving. However, the economy is close to “as good as it gets”, which suggests that it’ll start to deteriorate in 2019.
Let’s look at the data.
Initial Claims is trending sideways while Continued Claims is trend downwards. Historically, these two data series trended upwards before bear markets and economic recessions began.
This is not a long term bearish sign for the stock market, but will be if Initial Claims and Continued Claims start to trend upwards in the first half of 2019. Initial Claims & Continued Claims are very low right now (historically speaking).
Source: FRED
Inflation-adjusted Retail Sales are still trending higher. Inflation-adjusted Retail Sales trended sideways before the last 2 recessions and equity bear markets.
