7. Retail Sales Growth Stalls. Economic cheerleaders have short memories. The wealth effect of rising stock portfolios and rising home prices – circumstances created primarily by three decades of lower borrowing costs – can quickly reverse itself. Economic well-being in a consumer-oriented society is about high quality, high paying jobs with increasing prospects for advancement; economic well-being in a consumer-oriented society depends on the confidence to spend one’s wages/salaries based on non-transitory factors. (Remember, the Fed calls “low energy” a transitory factor.) It follows that we may be seeing the beginning of retail sales trending negative in a year-over-year basis. And that cannot be a healthy sign.
8. Revenue Contraction For Businesses. Do we already have a revenue/sales recession at major corporations? For instance, this will be the 3rd consecutive quarter of sales declines for the 30 companies in the Dow. Thank god for Apple. In fact, without Apple, the “info tech” sector would be reporting sales declines in the 3rd quarter. Note the rollover at the onset of previous recessions for total business sales.
9. CEO Economic Outlook Waning. I think it’s safe to say that CEOs at major corporations are in positions of considerable power. For instance, if their confidence in the U.S. economy declines significantly, they might be less willing to hire. The Business Roundtable reported that its CEO Economic Outlook Index has dropped all the way to 74.1 in Q3. That’s the lowest since three years ago in 2012. These are the same folks who will be faced with the choice of trying to boost share prices through stock buyback programs or going on a hiring spree or investing in plants/equipment or R&D. Looking at the sales, and the Federal Reserve, these folks may be getting ready to hunker down, not ramp up.
10. Manufacturing Freefall? Supposedly, 70% of the U.S. economy is tied to consumer activity. Nevertheless, this does not render the businesses that make stuff obsolete. And the only time that manufacturer new orders across all industry looked this horrendous? Before the last two recessions.
11. Inventory-to-Sales Ratio. At 1.36, this is the worst that this measure of business health has been since the last recession. Inventories have been piling up and sales have been going nowhere. In fact, if I am not mistaken, the wholesale inventories to sales has never been this high in its history. In essence, companies may be facing larger financial problems when they are collectively struggling to keep inventory down while sales are simultaneously slowing. It is a huge negative for the U.S. economy.
12. Global Economic Slowdown. There’s no other way to put this gently: The world economy is on the brink. Brazil, Canada, China, half of Europe, Australia, half of Asia, half of Latin America – countries have either entered recessions or they are trending in that direction. If nothing else, we should be cognizant of the reality that the U.S. is a part of a global economy that is decelerating. JP Morgan’s Global Manufacturing PMI is now at 50.7 where a reading below 50 would be indicative of a global manufacturing recession.
13. Credit Concerns Resurface? 3-month U.S. Treasury bills are deemed risk-free. In contrast, the rate associated with Eurodollar futures tends to reflect creditor ratings of corporations that borrow. When the spread between the two (a.k.a. TED Spread) rises, fears of default also rise. With the TED Spread at a 3-year peak, what might this be saying about the health of the global financial system?
In truth, I could easily provide 13 more unsavory charts of significant issues pertaining to the well-being of the U.S. economy. I stopped here to emphasize that these are the types of issues that the Federal Reserve recently grappled with when they decided not to leave zero percent rate policy behind them. Implicitly and explicitly, they’ve talked about needing to see labor force participation improvement as well as wage growth improvement. They haven’t gotten it. Implicitly and explicitly, they’ve talked about a desire to meet a 2% inflation target that they deem healthy for the U.S. economy. They have 0.3% year-on-year for July. And in the most recent meeting, as if market watchers were caught off guard, the Fed acknowledged that the U.S. is not an island unto itself; we are part of a global economy that has been crumbling all around us.
In last Friday’s commentary, I primarily focused on technical, historical and economic reasons “Why The S&P 500 Is Likely To Revisit The Correction Lows Near 1,870.” For those who want to review fundamental valuation and market internals – you might wish to return to “15 Warning Signs of a Market Top.” The feature was written prior to the August-September correction.
Keep in mind, it may be a challenge for some of the economic woes to subside. Absent a Fed that commits to moving at a pace like a 3-toed sloth – or one that actually reverses course to provide more QE-like stimulus – economic growth concerns will continue to weigh on investor sentiment in the near future.
If you had been 100% in cash prior to the selling pressure, you might look to purchase the S&P 500 SPDR Trust (SPY) in three increments. Your first increment might be near the correction lows of 187.5. If the lows of the market hold, you could purchase a second increment 5% higher near 197. I would not a commit a third and final increment without a break above the 200-day moving average.
Gary Gordon is president of Pacific Park Financial, Inc.