Last week the S&P500 crept up a tiny fraction of one percent. While almost unchanged, it did count as another positive week, taking the index even further into bubble territory. Volume was very light, as the Thanksgiving holiday shortened the week by almost two trading days. Swimming against the tide of rising prices, volatility jumped a bit, but not to levels far above those associated with complacency. It seems as though many investors wanted to take out some downside insurance.
Breadth was still fairly strong. So the euphoria that’s gripping the headline index is not limited to just a handful of stock leaders, but appears to be spread out fairly broadly among may of the smaller cap stocks as well. Sentiment is still extremely bullish and bears are utterly missing. While last week we noted that the percent of bears among investment advisors had hit multi-year lows, at the same time the percent of bulls is now hitting mult-year highs. The differential between these two measures is striking; it’s at extremes almost always seen only at major market highs, usually very near to major subsequent corrections, if not outright crashes.
Technically, the over-stretched equity markets have simply become even more over-stretched. The S&P continues to hug the upper Bollinger bands on the daily, weekly and monthly charts, as has been the case for the last couple of months now. Can this condition persist, or become even more extreme? Of course it can, but the payback, if history repeats itself, will only be that much worse.
US economic data releases have now almost caught up from the delays incurred due to the partial government shutdown. And last week’s data was mixed, at best. Pending home sales fell, when they were supposed to rise. The Dallas Fed survey missed badly. The Richmond Fed survey beat expectations. The FHFA house price index fell, when it was expected to rise. The Case Shiller index just met expectations, after almost a year of monthly beats. Consumer confidence plunged, yet the consumer sentiment survey rose. Durable goods orders, excluding the volatile transportation sub-index, missed badly. Instead of rising 0.4%, it fell 0.1%. The Chicago Fed National Activity Index, a broad survey of national economic activity, fell when it was expected to jump. But the Chicago PMI beat expectations as did the leading indicators report.
So where does this leave us in terms of US economic growth? Well Goldman Sach’s economics department just updated its estimate of 4th quarter GDP growth and it’s ugly. Goldman is projecting that the Q4 result will come in at just 1.3%, well below the consensus figure of 1.8%.
How bad is this? Well just three months earlier, at the end of the summer, the consensus estimates for Q4 growth were about 2.6%. And more importantly, history tells us that whenever the growth rate falls beneath the magical 2.0% level (and both the consensus figure and Goldman’s lower figure are both below this), then a recession almost always follows about six months later.
Does this mean the US is finally entering a recession, four plus years after the Great Recession ended? Although it’s not definite, it seems that this already long, albeit anemic, recovery is probably coming to an end.