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Executive Summary

In these Weekly Market Updates, I look “under the hood” at hard economic data and present it to our readers.  This information may be in contrast to what you hear or read in mainstream media outlets. Below you will find graphs illustrating retail sales and their trends, industrial production, home sales, a revised GDP forecast, as well as, a weekly leading economic index.  All of these are factors in the economy and impact the growth of the economy.  With the trends shown below, the risks in the market continue to run high. Please proceed to The Details for your own look under the hood.

“Get your facts first, then you can distort them as you please.”

– Mark Twain

The Details

Lately, it seems the status of the economy depends upon to whom you listen.  If your information is derived from financial media, you most likely hear how strong the economy is, therefore, justifying the most overvalued stock market of all time.  If, on the other hand, you get your outlook from politicians, it depends upon which party is delivering the viewpoint.  If you listen to the Federal Reserve’s FOMC (Federal Open Market Committee) members’ statements, you probably think the economy is relatively strong.  However, if you watch the actions of the FOMC, you might determine things aren’t looking too rosy.  I, however, prefer to look at the hard data.  Recently, there have been a number of significant economic data releases which might shed some light on the direction of the economy.

posts chart 1

Expanding the analysis a little further, the trend of retail control purchases continues to digress from the pre-Great Recession trend.  According to Advisor Perspectives, “‘Control’ purchases…is an even more ‘Core’ view of retail sales. This series excludes Motor Vehicles & Parts, Gasoline, Building Materials as well as Food Services & Drinking Places. The popular financial press typically ignores this series, but it [provides] a more consistent and reliable reading of the economy.”  The new “post-recession” trend, shown in blue below, is 4.9% below the new trend and 21.2% below the green pre-recession trend.

posts chart 2

In addition to retail sales, industrial production is a major component in determining economic growth.  An article on Zero Hedge last week stated, “Against expectations of a modest 0.1% MoM rise, US Industrial Production plunged 0.6% MoM in January, and was downwardly revised historically.  Driven by a 0.9% slump in manufacturing production.”  See chart below .

posts chart 2

The housing market has seen lower growth rates since late 2017. Notice in the chart below, the red line indicating the change in existing home sales since 2000 shows that as of December 2018 existing home sales were 4.6% below the level attained in 2000.  When adjusted for population growth, the current level of existing home sales is 18.6% below the 2000 level.  Both of these rates of change have declined over the past year.

posts chart 2

With the dramatic drop in retail sales and industrial production, combined with the waning of home sales, it is no surprise that the expectation for fourth quarter Gross Domestic Product (GDP) growth recently plummeted.  The chart below from the Atlanta Fed represents an evolving estimate of GDP growth for the quarter using their GDPNow forecasting model.  As can be seen, shortly after the end of the third quarter 2018, the GDPNow projection was for 3.0% growth for the fourth quarter.  Last week, this number nosedived to 1.5% estimated annualized growth.

posts chart 2
The graph below from Trading Economics illustrates quarterly realized GDP growth through the third quarter 2018.  Notice in the first quarter 2018, GDP growth was a mere 2.2%.  Then, juiced by the new tax cuts and pull-forward spending in anticipation of possible tariffs, GDP growth surged to 4.2% in the second quarter.  However, this “sugar high” is now wearing-off.  The growth rate fell to 3.4% in the third quarter, and as described above, is expected to drop to 1.5% in the fourth quarter.  It appears the 3.0% annual GDP growth goal might remain elusive for the time being.
Real GDP Annualized Growth by Quarter
posts chart 2

According to Advisor Perspectives, the outfit, RecessionAlert, “launched an alternative to ECRI’s Weekly Leading Index Growth indicator (WLIg). The Weekly Leading Economic Index (WLEI) uses fifty different time series from these categories: Corporate Bond Composite, Treasury Bond Composite, Stock Market Composite, Labor Market Composite, Credit Market Composite.”  The RecessionAlert WLEI is designed to warn of an impending recession.  While currently RecessionAlert is not forecasting a recession, the graph below of the WLEI indicates the level is below that obtained at the start of several prior recessions.

posts chart 2

The data above is not designed for market cheerleaders, politicians, or central bankers, but instead for anyone interested in hard economic hard data.  The current data indicates weakening trends in many major areas of importance to the overall economy.  While the Fed pronounces a strong economy, they also have paused their short-term rate hikes, for now.  Last year, predictions were for about four rate increases during 2019.  The Fed is now turning to “data dependent” rate increases.  This likely means they recognize the weakening data and are putting monetary rate-tightening on hold.  At the present time, the economy seems to be waving a yellow (caution) flag.

Most economic pronouncements come with a bias or agenda.  Beware of hidden agendas and focus on the data.

The S&P 500 Index closed at 2,776, up 2.5% for the week.  The yield on the 10-year Treasury note rose slightly to 2.66%.  Oil prices increased to $56 per barrel, and the national average price of gasoline according to AAA rose to $2.31 per gallon.

At Cremerius Wealth Management, portfolios are developed to take into account the state of the economy, market cycle and valuation, and relative strength. Our goal is long-term growth with limited downside potential.  If you need assistance with your portfolio, please give me a call. I would be happy to review your situation and explain how we can help you work towards achieving your goals.

Best Regards,
Bob Cremerius, CPA/PFS

© 2019. This material was prepared by Bob Cremerius, CPA/PFS, of Cremerius Wealth Management, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.

Securities offered through First Heartland Capital, Inc., Member FINRA & SIPC. | Advisory Services offered through First Heartland Consultants, Inc. Cremerius Wealth Management is not affiliated with First Heartland Capital, Inc.

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