The S&P500 jumped up almost 2% last week on slightly higher volume. Volatility eased down, but not nearly as much as it did during the mid-summer months. So while volatility is still hovering near multi-year lows, it’s slightly elevated levels could be signalling that investors are concerned about the equity markets in the month ahead.
Technically, the US equity markets are now somewhat overbought on the daily charts. And some breadth indicators are also suggesting that markets may be toppy on a short-term basis. The McClellan oscillator, for example, is stretched to the upside, so some sort of pullback should not be surprising. But the weekly charts have yet to turn officially bullish. It would take another week of strong gains for this to happen.
The US economy recorded several disappointing results last week. Job openings (as measured in the JOLTS report) came in far lower than expected. Wholesale trade missed badly. Producer prices came in roughly as expected. But retail sales were a disaster. The headline number missed by 60% and retail sales excluding autos missed by 67%. And in what was the biggest surprise of the week, consumer sentiment plunged in what turned out to be the biggest miss (vs. expectations) in the history of this series.
So fully four years after the so-called US economic recovery began, it seems as though the recent news is pointing to a lackluster recovery, at best. At worst, the US recovery could be headed into another recession.
In fact, Bloomberg’s Rich Yamarone recently wrote a piece in which he shows that when several key indicators fall below a 2% annual growth threshold, the US economy almost always—based on decades of history—falls into a recession within the following 12 months.
For example, when real final sales of domestic product (which excludes goods piled up in inventory) falls below 2%, the economy usually enters a recession. This figure is now 1.2%.
Also, when real disposable income and real consumer spending fall below 2%, the economy typically slides into recession. These figures are now 0.8% and 1.7% respectively.
Finally, when real GDP growth itself falls below 2%, a recession normally follows. In the most recent (second) quarter, this figure was running at an annual rate of 1.6%.
Does all of this guarantee that a recession is around the corner? Of course not, but if history is any guide, then the odds of a new recession are certainly more elevated today than they have been since the onset of the Great Recession in 2007.