For a recent analysis of the national outlook see here.
S & P 500
The following chart shows the weekly closing price of the S & P 500 beginning the first Friday in January 2019 thru the current date. What a blast during the recent weeks. The long increase in the S & P first underway during Obama’s administration is brought to an end by Trump. Is any collapse more dramatic than the following? Is any recovery more perplexing than this?
The strong recovery began in early April. What was unknown was the duration and extent of the upsurge. Last week, the adjustment began. The unknown now is the duration and extent of the downward adjustment.
The turmoil in the Trump reelection campaign cannot help.
The explanation for the recovery is the cash distributions Congress made to our citizens in the Spring. These funds were either spent or saved with both finding their way back into the banking and financial sector. With interest rates close to zero, the only alternative (except holding cash) is the stock markets and indirectly via mutual funds.
Last week the FED announced a change in policy towards inflation. Inflation targets will now be an average over some period instead of a single value.
Consequently, with inflation targets an average and interest rates low for an indefinite period into the future, expect the market to continue on its upswing. At some point in the future, the price/earnings ratio and the growth rate of corporate earnings will be reflected in the S & P index.
Since both the level and duration are unknown, the market faces uncertainty. Risk is different from uncertainty. Risk can be hedged and uncertainty cannot. An example of hedging a risk is home insurance. The source of risk is a fire. The purchase of fire insurance provides protection (the hedge) against financial loss resulting from fire damage.
Not so with uncertainty because both the future benefits and costs are both unknown.
(NEW – 20 September) The process underway in the market goes something like this. The U.S. Congress and the FED supplied the economy with huge and continuing sums. Stressed individuals and families spent the new funds. Businesses kept some employees on the payroll. Funds eventually found their way back into banks (particularly large banks) and the investment funds of various kinds.
Investors do not enjoy holding excess funds in checking accounts, so they sought a home. Comparing the return earned from bonds to equities, the decision was a no brainier. The result is the significant increase in the S&P index since the end of March.
These boosts to the market have ceased. The turmoil in the Trump’s reelection campaign and the uncertainty associated with what economic policies Biden’s election would bring adds to the uncertainty overhanging the market.
The market seems to sense two things. First, Trump’s reelection is doubtful. Second, the funds provided by Congress is ending. Also, the FED continues to pump funds into the mortgage and debt markets. (END)
The forecasts shown below are based on the actual historical patterns of the S & P index plus identifiable historic events (these are named interventions).
If the above chart were extended backward to earlier dates, it would show a significant upward trend with some downward blips (as seen for the short periods May – June 2019, August – September 2019 and mid-Jan – Feb 2020). An examination of the annual percentage increase in the S & P 500 during the past 5 – 10 years would reveal the increase to be 10 – 12% per compounding period. Investors following a passive investment strategy, i.e. buying an index fund, would earn a return exceeding the return earned following an active investment strategy with significantly lower risk as measured by the standard deviation of the annual returns.
The following table shows the summary of the actual and forecasts for the weekly change in the S & P 500 for 2020.
The actual change for the year = 564.08.
The following table shows the summary of the actual and forecasts and actual and forecast for the weekly change in the S & P 500 for 2019.
The sum of the actual forecasts to date for 2019 = 359.72. The total percentage change from the first to the last Friday in the year = 27.97%.
SUMMARY OF 2019
(NEW) The market increased from the first Friday in January thru the first Friday in April. Then the market was sideways with a significant increase in the variation (measured by the variance or standard deviation) thru the first week in September. This side-wise movement reflected the market’s focus on the Trump-China tariff negotiations. Since the first week of September, the outlook for some resolution of the tariff negotiations increased. The market resumed its upward climb.
The outlook for 2020 is, again, uncertain. The market will continue to be responsive to the resolution of the tariff impasse, expectation about corporate earnings, the final resolution of Brexit between the UK and EU, the overriding talk in the trade press about (the need) for a market adjustment, the response by the FED and any additional stimulus provided by fiscal policy. (END)
Investors always seek signals indicating the future level of the S & P index. Some of the traditional indicators include the price / earnings ratio, future earnings, international trade and many others. The following chart offers a graphic picture of a signal.
The variations in the above chart became more pronounced in early 2020. It is difficult to interpret. The following chart shows the period beginning 3 January 2020.
The signal offers a warning that the market is beginning a decline. The week ending 31 January the signal indicated a potential decline as revealed in the signal = 1 on 2 February. The two following weeks the signal returned to normal. The signal on 2 March followed by another on 9 March exhibited the largest downward thrust in over two years.
The signal remained equal to ‘1’ until 6 April followed by another ‘1’ on 13 April. On 27 April the signal returned to ‘0’.
The signal took the value = 1 on 29 June indicating the weekly close was below the lower limit of the forecast.
As long as the actual weekly close is below the lower forecast for two consecutive weeks expect the market’s decline to continue. When the actual falls between the upper and lower bounds, i.e., the signal = 0, the market is not changing direction.
Using any Friday’s closing of the S & P index, a statistical forecast is calculated for the close on the next Friday. A 95% confidence interval is calculated around the next Friday’s forecast. The interval is shown in the above chart as ‘Lower’ and ‘Upper.’
When the next Friday’s actual close occurs, it appears on the chart as ‘Actual.’ So the chart shows the forecast interval vs. the actual.
The signal is the actual close compared to the forecast interval (Upper and Lower) and is shown in the chart as the yellow line ‘Signal.’ Note on 9 February 2018 the actual close was below the ‘Lower’ forecast signalling a change in direction of the S & P index. The up and down movement in the ‘Signal’ continued until 13 April when the actual Friday close returned to close between the ‘Lower’ and ‘Upper.’ The upward trend in the weekly closing price of the index resumed until 19 October.
On 19 October 2018 the actual close fell below the forecast ‘Lower.’ The upward trend in the S & P index stopped to be replaced by a declining trend until 2 January 2019. Beginning on 2 January 2019, the upward trend resumes and continues.
How do investors use the signal? When the ‘Signal’ equals one, then a change in direction of the index follows. Do not buy the S & P index until the ‘Signal’ returns to zero. The signal returned to zero on 20 April.
Investors can buy the S & P index anytime the signal is zero.
In summary, the ‘Signal’ indicates a period of a ‘market correction’ when there is a pause in the upward and now downward momentum.
The signal is below the lower forecast limit for two consecutive weeks. This indicates the upward trend in the market has ceased.
Another slant on the market’s direction uses a measure of uncertainty.
The chart above shows the same time period as the preceding chart showing the ‘Signal.’
The uncertainty index is the difference between the ‘Upper’ and ‘Lower.’ From 5 January 2018 uncertainty slowly drifted up settling around 125. Then, uncertainty abruptly increased on 11 January 2019. It fluctuated around 275 and slowly drifted down. Uncertainty accelerated rapidly beginning in early April. The whipsaw trace since early April suggests the market responds the any tidbit of both positive and negative information. Currently, the market seems to only respond to announcements about progress in the development of virus vaccine.
Note the three periods in the uncertainty index. The first is a slow but stable slight increase from January 2018 to January 2019. In January 2019 the index shot up from near 130 to 290 followed by a slow decline until January 2020. The sharp decline to 145 in January 2020 followed by a flat period around 145. Then the virus effect became obvious in late March.
The index increased significantly with large week to week variations. The index seems stabilize at 250 beginning on 15 May.
The exact cause of the increase in uncertainty is unknown. The increase is most likely the result of a number of factors – Trump, China, Brexit, …. clearly the virus and the lack of the federal government’s response, and now the prospects for the development of a vaccine.
Note the index increased slightly for the week ending 17 July.
The following chart shows the weekly closing price of the S & P 500 for 2018
The following table shows the summary of the actual and forecasts and actual and forecast for the weekly change in the S & P 500 for the year 2018.
The total of the actual forecasts of -144.56 is not so good. One of the reasons for the negative value is the forecasting algorithm is that it is trend following. One of its characteristics is that the statistical methodology identifies statistically significant deviations from the trend after they occur. Unknown and unforeseen events will occur in the future, which will affect the underlying trend; but, their effects can only be identified after they occur.
Such unknown effects occurred during 2018. Most of the effects originate in the White House, i.e., trade wars, brow-beating and name-calling, etc. and the market reacts.
The S&P 500 began the year on 30 December 2016 at 2338.83. On 29 December 2017 the S&P 500 closed at 2673.61. The total change in points = 334.71, which is a 14.31% increase.
Forecasting of the weekly closing price of the S & P 500 began for the week ending 23 February 2017. The chart below shows the weekly actual closing price.
The following table shows the summary of the actual and forecasts and actual and forecast for the weekly change in the S & P 500 for the year 2017.
Last updated on 20 September using data for the week ending 18 September.
Source: FRED, S&P 500, weekly, aggregation method – end of period, and the author’s calculations.
GDP GROWTH RATE
(NEW) What is clear is that forecasting the growth rate of GDP is a fools errand. The pandemic coupled with irrational comments from Trump, no policy responses to control the spread of the virus from the White House and knee-jerk responses by most of the State’s governors are the basis for questionable forecasts.
The third round of the virus is underway. K – 12 and university school openings, football games, and beer festivals all contribute to the increases in reported cases and deaths. Generally, state governors cannot resist the pressure from business interests and athletic supporters.
However, if the public would wear masks anywhere outdoors, maintain 6′ distancing and wash their hands, the virus would slowly diminish; but, the public won’t. (END)
The future GDP growth rates shown below reflect the underlying/historic pattern of GDP. The effects of the massive tax cut directed towards high income individuals and corporations has dissipated. The republican Senate simply will not acknowledge the need for another broad injection of funds into the economy.
(NEW) The graph above reflects the revised GDP.
The Bureau of Economic Analysis releases its first estimate at the end of the month following the end of the quarter (in July) and its second release during the last week at the end of the second month following the end of the quarter (in August).
With all the troubles Trump has instigated, the forecast for GDP growth rates as the November 2020 election approaches cannot be good news.
The trade press and every forecaster offers their version of what the future holds. None reflect any pattern in the monumental effects on all the macroeconomic series available. Hence, all the forecasts are the forecaster’s best guess. The forecast for the 3Q2020 shown below is a guess. Future forecast of the quarterly GDP will be offered after the historical patterns in the relevant series are established.
Analysis updated on 20 September reflecting data thru 2Q2020.
SOURCE: FRED, series – GDPC1
% CHANGE IN CPI
Inflation is not a threat at the present time. The trillions of dollars inserted into the economy by Congress and the FED has not resulted in any inflation, so far.
The graph below shows the actual and forecast of the 12 month percent change in CPI.
The Bureau of Labor Statistics releases the previous months estimate of CPI in the middle of the current month.
Updated on 20 September using data thru August 2020.
SOURCE: FRED, Series – CPIAUCSL
The U.S. unemployment rate lurched to a peak in April. It has begun a declined but expected to follow a slow decline for the next six months. The virus resulted in two peaks and now with the schools and universities opening, expect a third peak beginning in September.
Expect the virus to continue its stress on the U.S. economy until a safe vaccine is widely available sometime in the summer of 2021.
Updated on 20 September using data thru August 2020.
SOURCE: The unemployment rate is calculated to six decimal points using data from FRED, series – CLV16oV and LNS13000000.
MONTHLY CHANGE IN U.S. PAYROLL EMPLOYMENT
The 12-month change in payroll employment follows a similar pattern as the unemployment rate. The large change in the April value is followed by by some increases thru August. The effects of the second peak in the virus reduces the prospects for any significant change in payroll employment for the fall. The prospects for a third round of the virus following the opening of schools and universities is high.
The following graph shows the actual monthly change from January 2018 thru July 2020 monthly forecasts September 2020 – February 2021.
Updated on 20 September 2020 using monthly data thru August 2020.
SOURCE: FRED, series PAYEMS, seasonally adjusted