Ratio Of Current Conditions And Expectations Could Worry Equity Investors
Ed Yardeni | Jan 31, 2019 12:14AM ET
The S&P 500 is one of the 10 components of the Index of Leading Economic Indicators (LEI). The LEI stalled during the last three months of 2018—falling 0.3% in October, rising 0.2% in November, then falling again by 0.1% in December. The drop in stock prices accounted for much of that weakness. The rebound in the S&P 500 so far in January is a relief.
However, the selloff late last year and the partial government shutdown early this year depressed the expectations sub-index of the Consumer Optimism Index (COI) during January (Fig. 1 ). This is the average of the expectations components of the Consumer Sentiment Index (CSI) and the Consumer Confidence Index (CCI). That average is also one of the LEI indicators, and it has fully reversed the jump it took after Trump was elected president.
The good news is that the current conditions component of the COI remains at a cyclical high, edging down only slightly during January. That reflects the continued strength in the labor market. So does the 213,000 increase in ADP payrolls during January.
However, if you are a worrier, then you can certainly worry about the ratio of the current conditions and expectations components of the CCI, which tends to spike higher at the start of recessions, as it did this month (Fig. 3 ).
I expect that expectations will rebound along with stock prices, assuming that there isn’t another government shutdown in the offing. I also expect that an amicable resolution in the U.S.-China trade talks will boost stock prices and consumer confidence.
Helping to boost sentiment for both stock investors and consumers, yesterday’s decision by the FOMC to pause rate-hiking. Yesterday’s FOMC statement’s language that “further gradual increases” in interest rates were warranted. Instead, a more cautious approach was signaled:
“In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”
In a separate statement released yesterday too, the FOMC also signaled a more flexible approach to QT, i.e., the paring of the Fed’s balance sheet:
“The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments.”
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At 2681, the S&P 500 is now up 14.0% from the 12/26 low of last year, and is only another 9.3% gain away from its 9/20 record high of 2930. My year-end target of 3100 is looking more achievable.
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