Investors were bearish lately and many expected a waterfall selloff after Russia invaded Ukraine. However, the S&P 500 did not match their expectations. The index rallied after a brief period of weakness. It trades higher than before the geopolitical event hit the newswires. The underlying conditions were not fertile for a more substantial selloff. Macroeconomic fundamentals signaled a constructive setup and proved more trustworthy than trading in fear of the newsflow. The S&P 500 will probably continue to the upside and reach another all-time high during the next months. A sober look at macroeconomic evidence leads to his conclusion.
Temporary employment has been roaring with a recovering job market. That’s good news because the labor market started weakening on average eight months before all post-WW2 recessions in the US.
The temporary employment segment is even more sensitive as temps get laid off first typically. However, there are no signs of weakness right now. That’s also good news for stocks. The S&P 500 cyclically peaked on average two months after permanent employment during the past seven decades. Therefore, there is no signal of a cyclical peak from the labor market.
The most common gauge is the 10y minus 2y treasury yield differential. It is not inverted at the time of this write-up. Moreover, the stock market did not crash instantly as the yield curve inverted. An inverted yield curve proceeded a cyclical stock market high on average by 5-6 months during the past 70 years. The gauge has been a reliable leading indicator for the economy and the stock market. The current shape of the yield curve does not flash a bearish signal.
Conference Board LEI
The conference board’s leading economic index’s latest reading came in slightly below its December all-time high. In the past 70 years, the indicator’s cyclical peak has been nine months before the next recession. Moreover, the indicator preceded cyclical stock market peaks by two months. Bears might argue that the December ATH is already two months away and ideally within the historical range of the signal. That’s true, but the LEI usually deteriorated much sharper before a recession hit. The indicator is just -0.2% shy of its ATH and could reset the signal next month. Again, there is no red light flashing here. It looks merely orange on this indicator.
Credit spreads did not only deteriorate before recessions. They preceded cyclical equity peaks as well. Moody’s seasonal Baa corporate bond yield relative to the 10y treasury yield summarizes the historical evidence. Credit spreads widened 17 months before the US economy went into recession. The indicator led the stock market as well historically. Moreover, it is not flashing red lights, although a widening may have started. The issue for bears here is that credit spreads have not widened enough yet. Historically, the gauge widened by at least 0.5% before the wheels came off in the stock market. That’s not the case today.
Since last month, macroeconomic indicators have slightly weakened. However, they do not signal a recession and sustained bear markets unfolded in recessionary environments only. This time will unlikely be different. The US stock market has most likely not peaked yet. Savings will continue channeling liquidity into equities. The bottom line is that the bull cycle most likely continues during the next few months.