Trade Talks Stalled – Markets React Adversely
Despite the breakdown in trade talks between the U.S. and China last week, and the imposition by the U.S. of a 25% tariff on $200 billion of Chinese goods, both sides have indicated they are anxious to continue trade talks. China has invited U.S. trade officials to Beijing to continue the talks. The breakdown in talks last week appears to have been the result of miscues on both sides. Nonetheless, U.S.-China tensions escalated when China laid out plans for tariffs of its own on $60 billion of U.S. exports to China; and the U.S. raised the possibility of $300 billion of new Chinese products which could be subject to 25% tariffs.
Economic and Investment Highlights
Last Week
Job growth at small firms has fallen to the lowest level in eight years due to the tight labor market. The U.S. labor market is at its tightest levels in 50 years.
There is an increasing trend of loans to borrowers with heavy debt loads. This raises the prospect of higher defaults should the economy falter. Some housing economists also contend that the increased demand from these loans is artificially raising housing prices.
Retail sales slipped a seasonally adjusted 0.2% in April from March.
Factory output fell 0.5% in April from March.
U.S. companies have been buying back their own shares at a strong pace for more than a year. Share buybacks increase companies’ earnings per share as there are fewer shares outstanding after a buyback. Companies often buy back their shares when markets decline and they have cash on hand to do the buybacks.
The S&P 500 declined again for the second straight week. The Dow Jones Industrial Average declined for the fourth consecutive week. The point & figure chart of the New York Stock Exchange Bullish Percent Index went into Bull Correction status on May 14, 2019 (see Chart for Review and Thought below).
The Week Ahead
This link takes you to Econoday’s Economic Calendar and Economic Events and Analysis which shows the upcoming economic reporting events scheduled in the week and months ahead.
Summary
Note: The comments that follow are derived from the economic indicators referenced in the Resources section and other sources at the end of this report.
The Aruoba-Diebold-Scotti Business Conditions Index (ALS) has been trending up the last several weeks and is now very close to the zero line. The ALS Index advanced slightly again this past week. This is a very positive indicator for the economy on a short-term basis.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2019 is 1.2 percent on May 16. This reading continues to support the ALS model assessment of an improving short-term economic environment.
The New York Fed Staff Nowcast stands at 1.8% for 2019:Q2.
The Chicago Fed National Activity Index (CFNAI) showed a decline in economic activity in April. The Chicago Fed National Activity Index (CFNAI) was –0.45 in April, down from +0.05 in March.
All told, these short-term economic indicators are a positive analysis for the economy, at least on a short-term basis. However, all but the ALS showed a slight decline in the past week.
Expectations that stock prices will rise over the next six months declined 13.3 percentage points to 29.8% in the latest AAII Sentiment Survey. The historical average is 38.5% for the survey. Please see the AAII Sentiment Survey for the complete results.
The latest Gross output (GO) reading suggests slow economic growth as we enter 2019.
On a longer-term basis, the forecasters in the Philadelphia Fed’s Survey of Professional Forecasters (as of May 10, 2019) predict real GDP will grow at an annual rate of 1.9 percent this quarter and 2.1 percent next quarter. On an annual-average over annual-average basis, the forecasters predict real GDP to grow 2.6 percent in 2019, 2.0 percent in 2020, 1.9 percent in 2021 and 2.3 percent in 2022. The forecasters predict the unemployment rate will average 3.7 percent in 2019, 3.6 percent in 2020, 3.7 percent in 2021, and 3.9 percent in 2022.
For a more in-depth review and analysis of the economy, please see our mini-book on economic analysis and forecasting entitled: Simple and Effective Economic Forecasting.
Stock Market Valuations
Our estimates of the market valuations for two stock market indices, the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P 500), can be found in the file below:
Stock Market Valuations are not available for this week. Please see last week’s Commentary for the valuations for that week.
Conclusion
We continue believe the economy is in a stable but somewhat vulnerable state. Nonetheless, it has remained fairly strong. In fact, the extremely strong first quarter GDP showing and the strong labor market conditions give us more confidence that the economy, now in its tenth year of expansion, can continue to grow. Please see our complete Economic and Investment Review in the Winter 2019 quarterly issue of the Intrinsic Value Wealth Report Newsletter.
Even with the further pullback in the market this past week, it remains overvalued. But that does not mean that a market correction is imminent. Markets can and do stay overvalued for long periods of time. As discussed above in the Economic and Investment Highlights section of this Commentary, we believe the economy is in a stable but vulnerable state. If the economy remains strong, the markets will likely remain strong. If the economy deteriorates, the markets may well correct. There are other events that could trigger a market correction, of course, but economic conditions are the most likely and foreseeable events that could make that happen.
We believe it is important to maintain a long-term view toward investing. This means that you should continue building your investment portfolio using the Cassandra Stock Selection Model to select individual securities that offer growth and value opportunities.
Chart for Review and Thought
Announcements
We have been researching the use of crowdsourcing for investment ideas. We will be sending a survey out in the next few weeks to get your input on the economy and the markets; and to get any investment ideas that you would like to share. We will compile this input and distribute the results to you and our other subscribers.
Dr. Wendee will be speaking at the Las Vegas Investment Club on June 24th. He will be speaking on the topic of his popular Forbes article, Nine of the Best Ways to Build Wealth. Please contact Mike Lathigee at mike@mikelathigee.com if you would like to attend.
Dr. Wendee will be speaking at FreedomFest during its annual conference in Las Vegas, July 17 – 20, 2019.
Dr. Wendee will be a judge at the FundingPost June PitchFest Event on June 11, 2019 in San Diego. Click on this link for details on the event:
https://www.fundingpost.com/event/reg1.asp?event=433
Dr. Wendee attended the Money show in Las Vegas this past week.
Business 539 – Financial Management – On May 9, 2019, Dr. Wendee started teaching Business 539 – Financial Management at California Baptist University (CBU). Dr. Wendee teaches courses in Finance and Economics at CBU.
Management 3080 – Business Responsibility in Society – Dr. Wendee will be teaching Management 3080 – Business Responsibility in Society at California State University, Los Angeles (CSULA) starting May 29, 2019. Dr. Wendee teaches courses in Management at CSULA.
Intrinsic Value Wealth Creation pyramid
We always conclude our commentary with a discussion of the Intrinsic Value Wealth Creation Pyramid. The Intrinsic Value Wealth Creation Pyramid is designed to show some of the major categories for building wealth. It is the result of many years of study of the wealth building process; experience working with clients who have built considerable wealth; and my own personal experience building wealth. Newsletter subscribers should consult the Intrinsic Value Wealth Creation Pyramid as one of many useful investment tools while considering their investment plans.
The chart in this section is an expanded version of the Intrinsic Value Wealth Creation Pyramid Chart referenced in the Forbes.com article entitled, Nine Of The Best Ways To Build Wealth.I
RESOURCES
Economic Indicators
Below are links to a few of the many resources that we follow on a continuous basis to track the economy and financial markets on a short-term and long-term basis.
Real-Time and Current Economic Conditions
The Federal Reserve Bank of Philadelphia’s Aruoba-Diebold-Scotti Business Conditions (ADS) Index is designed to track real business conditions at high frequency. Click Aruoba-Diebold-Scotti Business Conditions Index to access this model.
Click GDPNow to access The Federal Reserve Bank of Atlanta’s GDPNow Forecasting Model.
The Federal Reserve Bank of New York’s Nowcast report tracks the evolution of the FRBNY Staff Nowcast of GDP growth and the impact of new data releases on the forecast. Click Nowcast to access the report and background information on the report.
The Chicago Fed National Activity Index (CFNAI) is a monthly index designed to gauge overall economic activity and related inflationary pressure. Click CFNAI to access this index.
Economy At A Glance
The National Economic Trends charts provided by the Federal Reserve Bank of St. Louis (FRED) can be accessed by clicking the Economy At A Glance link below:
Gross Output
Gross Output is a measure that may be more useful than the Gross Domestic Product (GDP) measure, as it looks at the top line of national income accounting. It is also a good measure to use in conjunction with GDP to get a better overall picture of the economy. This measure can be accessed by clicking the links below:
Surveys of Professional Forecasters
The Survey of Professional Forecasters’ web page offers the actual releases, documentation, mean and median forecasts of all the respondents in the Fed’s Survey of Professional Forecasters. Click the following link to be taken to the Federal Reserve Bank of Philadelphia’s website to access the current survey: Survey of Professional Forecasters.
The Livingston Survey of Professional Forecasters’ web page offers the actual releases, documentation, mean and median forecasts of all the respondents in the Fed’s Livingston Survey. Click the following link to be taken to the Federal Reserve Bank of Philadelphia’s website to access the current survey: Livingston Survey.
Econoday
Econoday offers some excellent resources for understanding and forecasting the economy. The link below takes you to Econoday’s Economic Calendar and Economic Events and Analysis sections. Please see Econoday’s Economic Calendar for upcoming economic reporting events in the week and months ahead.
AAII Investor Sentiment Survey
The AAII Investor Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months: AAII Investor Sentiment Survey.