As illustrated below, each of these three economic indicators are reported in the media headlines in the aggregate, that is, their sum. Because the first two were better – up and improved, respectively – compared to the month before, the financial media, and especially permabull TV talking heads, claim they are bullish indicators for the stock market, but none is: all three are bearish for the stock market as we demonstrate here.
To see this, the components of each need to be compared to the stock market since their aggregates are confounding - at best - as stock market timing indicators.
Updated Federal Budget Through Nov
Like the federal (Treasury) budget balance, about which we wrote in our Nov 12 email to you – see it below with Friday’s Treasury report of the Nov data and updated chart – only the individual components, receipts and outlays, on a year-over-year comparison (y/y%), or rate of change, basis, give crude stock market timing signals, and then onlyon a long term (quarters) basis. The graph shows y/y% outlays have clearly turned up and y/y% receipts will soon start turning down - since they have peaked significantly on a month-to-month basis https://www.fms.treas.gov/mts/mts1110.pdf - both of which history clearly shows, albeit counter intuitively, are bearish for the stock market on a long term (quarters) basis.
Trade Balance
For the trade balance, as illustrated in the first chart below and again on a y/y% basis, exports are more volatile than imports, so during business cycle contractions they decline faster than imports. This crossover creates an improving trade balance – see the third chart below – but this is not bullish for the stock market as you can see by comparing the second and third charts below. This also counterintuitive result is why in our core business cycle metric we exclude from GDP reported data, the trade balance, along with countercyclical government expenditures (discussed above) and often counter cyclical and volatile private inventories.
Clearly, both imports and exports have peaked and have turned down on a y/y% basis, which we fully expect they will continue to do, which is bearish for the stock market on a long term (quarters) basis.
Consumer Sentiment
Then there is today’s report for University Michigan Consumer Sentiment indicator, which is both earlier (both in reporting and on a business cycle timing basis, because of better poll questions) and better than the Commerce Dept’s Consumer Confidence indicator. The Dec data was up and the financial media, and especially permabull TV talking heads, claim it is bullish for the stock market. But as we’ve explained in past years, the components, future expectations (Outlook) and present conditions tell a more timely and accurate story for the stock market.
Their aggregate (Total in the chart below) is not only still below its 2001 recession low, having retraced only one-third of its decline, but it’s recent rise is still below its Jun high, creating a negative divergence with -- and for -- the stock market, especially with future expectations (Outlook in the table below) in Dec continuing its one-year bearish spread with current (Present in the table below) conditions.
Dec Outlook (expectations) minus Present (conditions) spread was: -1.6 = (66.8 - 64.8) – (85.7 - 82.1)
Nov Outlook (expectations) minus Present (conditions) spread was: -2.6 = (64.8 - 61.9) – (82.1 76.6)
Trade Balance
There’s lots of discussion about the advantages/disadvantages of federal spending for stimulating the stalled and depressing growth rate in the economic recovery, with the underlying popular assumption that federal deficit spending is not good for either the economy or the stock market. But a logical analysis of the track record of the year- over-year (y/y%) growth rates in both federal receipts and outlays creates a different perspective from their usually referred to combination in dollars, which is the federal budget surplus or deficit.
Notice in the 15-year chart below that the trends in the growth rate of Federal Receipts are generally positively correlated with major trends in the stock market, and trends in the growth rate of Federal Outlays are generally negatively correlated.
Because crossovers of these two data series, which occur only some time after each has peaked or troughed before heading towards each other, and since each has varying leads or lags with major stock-market turning points, which often further extends the lag in their crossovers, they always lag the stock-market turning points and, therefore, are not a useful timing indicator when combined, as in the federal budget surplus or deficit.
But separately, the cycle-trends in the y/y% growth rate of these components of the federal budget, whether the budget in dollars is in surplus or deficit, are both useful and mutually confirming stock-market timing indicators. Although this situation of the budget in dollars not being relevant maybe counterintuitive, this is not an uncommon with multi-dimensional market-timing indicators, so it worth understanding how and why it occurs rather than simply that a federal budget surplus is bullish and a federal budget deficit is bearish as investment decision-making. factor.
In conclusion, we fully expect both Receipts to top out and Outlays to bottom out soon, which will be very consistent with our expectation for a third major stock-market decline during this ultimately deflationary economic Supercycle Winter.
[The following charts have been updated with Nov data as reported Friday, Dec 10]
