When you look at the news, a lot is going on. Between politics and geopolitics, the macro environment is more unstable than usual. We see the same on the economic front for both macro and micro reasons. Economic growth is down and up. Job growth is up—or is it? Consumer and business confidence are down—or are they? And, of course, inflation and long-term interest rates have been trending down—until recently, when they started trending up again.
With all this in play, markets have difficulty figuring out where to go, especially when considering the earnings outlook. Earnings are down this quarter but are expected to rise throughout the year. Companies are worried, but that’s not what they are saying (really) on their calls.
To make sense of it all, to the extent we can, now is an excellent time to look at what matters now. Here is what I am watching closely as the best indicators for how all this uncertainty resolves.
1. Job Growth
Job growth and current consumer confidence are the numbers to watch. Job growth is evident, as people need to work, but the key number here is 200,000 per month. Job growth has been consistently above that, and it is below that number that the economy starts to weaken. Current consumer confidence is less obvious, so let’s dig in a bit.
2. Confidence Numbers
The confidence number that is reported has two different subseries: current confidence (which reflects how people feel right now) and expectations (which reflects how they expect to feel in about six months). The current number controls how they act now, and it has held steady for the past year and more, despite everything.
That explains why the economy has held up much better than expected. If current consumer confidence erodes, that will be the key to weaker performance. Jobs matter because working people make money to spend. Current confidence matters because that means they will spend right now. If both of those turn down, so will the economy. Until then, we are in good shape.
3. Inflation: Housing and Energy
Interest rates respond to what the Fed is doing, which depends on inflation. So, inflation is what we need to watch. However, this is a broad category, and we need to dive deeper.
As I have discussed before, housing is the main item driving inflation right now. If housing costs continue to soften, so will inflation. As such, I will watch rental rates and housing prices nationwide. At the moment, housing matters more than anything else for inflation, which will drive further declines.
I say “at the moment” because energy is returning as an inflationary concern. After serving as a disinflationary factor over the past several months, energy prices will return to neutral throughout the year and may, if they rise again, turn inflationary again. So watch gas prices as a good proxy for energy, and watch housing. That will tell us what we need to know about inflation.
3. Markets: The Final Piece of the Puzzle
Markets draw from both the economy (for earnings) and interest rates (for valuations). Earnings, jobs, and confidence will drive the economy. So far, the news looks good, as analysts expect strong earnings growth through the rest of the year. For valuations, the news is less good, as rising long-term interest rates are back to levels from around the financial crisis, when valuations were lower. This explains much of the recent volatility but doesn’t tell us where it will go.
So, that is what I am watching and why: jobs, current confidence, housing, and energy. It’s easier to focus on those four than everything all at once and likely just as practical, if not more so. Right now, the news remains positive. But those will be the signals we need to tell when and if that changes.
Disclaimer: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged, and investors cannot invest directly in an index. Member FINRA/SIPC. Commonwealth Financial Network®.