Stock investors have enjoyed a magical bull market since March 2009. It was particularly magical during 2017, when the S&P 500 rose 19.4% (Fig. 1).
Such a double-digit return is quite extraordinary for an aging bull market going on nine years old in 2018. The magic seemed to stop abruptly when the S&P 500 plunged 10.2% over 13 days from late January through early February (Fig. 2).
Joe and I believe that the latest selloff marked the fourth correction in this bull market, not the beginning of a bear market.
The economic fundamentals remain bullish:
(1) Boom-Bust Barometer. Our Boom-Bust Barometer (BBB) is simply the CRB raw industrials spot price index divided by initial unemployment claims. It is a great coincident indicator of the US business cycle (Fig. 3). As Debbie reviews below, it soared into new record-high territory in recent weeks. It did so as the CRB index rose to a new cyclical high following its freefall from the second half of 2014 through the end of 2015 (Fig. 4). At the same time, weekly initial unemployment claims have dropped to their lowest levels since March 1973 (Fig. 5).
(2) Weekly Leading Index. Debbie and I have devised a Weekly Leading Index (YRI-WLI) that is an average of our BBB and Bloomberg’s weekly Consumer Confidence Index (CCI). It is highly correlated with the index compiled by the Economic Cycle Research Institute (ECRI-WLI) (Fig. 6). Our WLI is based on an open-source formulation, while theirs is based on a secret sauce. Both have been rising in record-high territory in recent weeks.
The YRI-WLI is soaring because the BBB is doing so, and so is the CCI (Fig. 7). Consumers have lots of reasons to be overjoyed with the unemployment rate at a cyclical low and many of them bringing home paychecks boosted by tax cuts. The CCI is the highest since February 2001.
(3) Forward earnings. Interestingly, the S&P 500 forward earnings is highly correlated with both the Boom-Bust Barometer and the YRI-WLI (Fig. 8 and Fig. 9). The earnings measure is a time-weighted average of analysts’ consensus expectations for S&P 500 earnings during the current year and the coming year. It’s been soaring ever since the end of last year when the Tax Cut and Jobs Act (TCJA) slashed the statutory corporate tax rate.
(4) Stock prices. Given all of the above, it’s no wonder that the S&P 500 stock price index is highly correlated with the YRI-WLI (Fig. 10). The latter, which is up 9.4% y/y, remains bullish for the former.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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