U.S. Stock Market Strong while Economy is
Weakening
By Victor Sperandeo with the Curmudgeon
As of
Fridays close, the S&P 500 had increased nine consecutive trading days --
its longest winning streak since 2004. The S &P index jumped 10.2% in that
span2.9% of that in the past weeka remarkable performance given the cloud of
uncertainty hanging over American businesses from President Donald Trumps
chaotic tariff policy and his threats to fire Fed Chairman Jerome Powell. As a
result, the U.S. equity market has retraced its losses since the April 3rd
Liberation Day selloff. Indeed,
the market has climbed a wall of worry with tremendous resiliency in
light of many negative economic reports last week.
The Aden Forecast notes that the NASDAQ is
bouncing up from its 2021 support level, and from the extreme leading indicator
lows. Thats depicted in these two charts:
Heres
a chart of the now bullish Primary Trend Index (PTI), courtesy of the Aden
Forecast:
Editors
Note:
In 1969 Richard Russell devised the Primary Trend Index, composed of eight
market indicators that he never publicly divulged as his own secret recipe.
When his index outperformed an 89-day moving average, it was time to buy. When
it underperformed the 89-day moving average, a bear market was at hand. Only the Aden sisters know what those eight
indicators are as they have maintained it since they took over Russell's Dow
Theory website.
.
On
Wednesday, the U.S. Commerce Department reported that GDP declined by
0.3% in the 1st quarter of 2025, marking the first decline since early
2022.
The
report also showed a buildup of inventories, as companies stocked up on
goods in anticipation of future tariff-based price hikes. That gave the economy
a short-term boost, but it could slow things down later if businesses reduce
new orders to clear out inventory.
All
the uncertainty around trade is making companies more hesitant to invest or
hire. The number of Americans filing new claims for unemployment
benefits rose to 241,000 for the week ending April 26th, an increase
from the previous week's 223,000 and above the 225,000 forecasts. This uptick
suggests a potential softening in the labor market.
Consumers
are also being pinched by higher prices, especially for goods made in
China which have been hit with 145% tariffs. the Conference Board's Consumer
Confidence Index falling to a five-year low in April. This decline is
attributed to various factors, including concerns about tariffs, inflation, and
the overall economic outlook. Consumers are also increasingly pessimistic about
their future income and labor market prospects.
The Conference
Board Leading Economic Indexฎ (LEI) for the U.S. declined by 0.7% in March
2025 to 100.5 (2016=100), after a decline of 0.2% (revised up from 0.3%) in
February. The LEI also fell by 1.2% in the six-month period ending in March
2025.
The
U.S. LEI for March pointed to slowing economic activity ahead, said Justyna
Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The
Conference Board.
Finally,
the CRB Commodity Index shows economic weakness. It was 313.56 on 4/2/25, but closed Friday at
290.30 for a loss of -7.42%. Energy is
39% of the index, which accounts for 2.9% of the current CRB decline which is
certainly NOT inflationary.
Victors
Stock Market Comments:
According
to the long-term indicators I have discussed in past Curmudgeon/Sperandeo posts
(like this one), U.S.
stocks remain in a Bear Market. This must always be kept in mind when trading
and/or investing.
About
135 years ago, Charles Dow observed that there are three distinct trends always
working in the stock markets:
l The long-term
trend which is months to years;
l The intermediate
trend that is weeks to months; and
l The short-term
trend is days to weeks.
Currently,
the long-term trend is still DOWN, while the intermediate and
short-term trends have turned UP.
The last Primary Movement - according to Dow Theory and the 200 day
MA- is down and that should persist
unless there is a change of the long term trend. Also, the volume was heavy on
the downside and light to moderate on the upside of the recent rally.
The
question almost always asked is the current intermediate trend a new leg of a
Bull Market, or a correction in the Bear Market:
l Using
the S&P 500, a new Bull Market would make the Bear Market from
2/19/25 to 4/8/25 only 48 days.
l Using
the Dow Jones Industrial (DJI) average, the high was 1/29/25 making for
a 69-day Bear Market.
l Under
the Dow Theory, the Dow Transports must also be measured, and
they are not even in an intermediate uptrend yet.
Dating
back to 1896, there have been no U.S. equity Bear Markets that have had this
short a duration (i.e. before a change from Bear to Bull)!
.
Curmudgeon
on the Bond Market:
Long
term U.S. bonds remain in a multi-year Bear Market. The iShares
20-year U.S. Treasury bond ETF (TLT) had Total Returns (%)
for 1 yr, 3r, 5 yr, 10 yrs of 0.17,
-8.65, -8.96, and -1.07, respectively.
And that is BEFORE inflation and income taxes! Compare the TLT total returns vs
S&P 500 over same period!
.
Whats
Driving the Equity Markets:
Perhaps,
if the Fed injected a trillion+ dollars into the economy as it did in March
2009, or in March 2020 (which was NOT a Bear Market by my indicators) one could
make the case that this is a fundamental reason for a long-term trend change,
but that is not the case right now.
President
Donald Trumps contradictory talk and erratic social media posts created the
current market movements, not permanent actions. His words can change by whim
after a Fox TV program. Despite Trumps
repeated call for lower short-term interest rates, the Fed is on the
sidelines. Historically, that is quite
unique when markets are crashing with the economy weak and slowing.
U.S.
Treasury Secretary Scott Bessent has convinced Trump to stop the ridiculous
threats of firing Jerome Powell (which he cannot do) as it is causing the
markets to panic. Moreover, Bessent indicated that the U.S. trade policy
(tariffs and export restrictions) with
China was NOT SUSTAINABLE. That
effectively canceling the Make America First Investment Memo issued 2/21/25
which we discussed in this
post. All that talk stimulated the
strong stock rally of the past nine days.
Victor
on the Uncertain Outcome of Trumps Tariffs:
The
markets continue to be focused on tariffs.
To reiterate, tariffs are a tax thats aimed at foreign governments and
their producers of goods and services exported to the U.S. While most analysts believe that American
companies importing items subject to tariffs will pass the cost on to consumers
or other companies,
It is
possible, but not probable, that Trumps tariff policies could result in lower
prices. For example, if Trump negotiates a deal with the European Union for
ZERO bilateral tariffs, prices will likely decline in both regions. Also, if
tariffs are set too high such that imported goods become unaffordable, prices
might decline as people stop buying those products.
-->No
one knows (or even has a clue) what will be the result of tariffs on the U.S.
economy and markets.
If
the Trump administration negotiated an average 16.5% tariff with all countries,
then Trumps hyperbolic statement of ending taxes for all U.S. people paying
taxes of $200K or less could be a reality.
Heres the math: the U.S. taxpayers paid $2.4 trillion last year in
total INCOME TAXES, and bought $4.110 trillion in foreign goods
the 200K or less earning US taxpayers paid 26
% of those taxes or $676 billion (estimated). Therefore, a 16.45% average
tariff would collect $676 billion in taxes, if passed on to those earning $200K
or less. It would completely pay their income taxes
all things being equal,
which they never are! This is not
likely, but possible. Of course, as you
raise the price of something you will alter the supply/demand curves and change
the dynamics.
PhD economist Lacy Hunt explains all this and more in a video
titled, The Five
Recessionary Forces Creating an Economic Interregnum. The key take aways from Dr. Hunt is the U.S.
economy is very weak. Tariffs caused
consumers who are really in poor financial shape, I WOULD SAY WRETCHED
FINANCIAL SHAPE to actually
buy ahead of tariffs. TARIFFS ARE DEFLATIONARY. The economy is in a more frail condition...
Lacy added, I think monetary policy is too restrictive
. The
Fed is again making a policy error
By
letting money supply decline and NOT CHANGING you will NOT have a recovery in
2026.
-->Victor, the Curmudgeon and many analytical economists
think Dr Hunt is the best of breed economists today. The above referenced
Interview with him is priceless in our opinion.
-->Lacy has been a colleague and friend of the Curmudgeon
for over 30 years (since Curmudgeon was a RIA at Jack White Institutional in
1995).
A Look Back at the 1973-1974 Bear Market:
Upsetting
the political system and causing an unknown crisis related to the U.S.
Constitutional order or rule of law was primarily responsible for the 1973-74
MAJOR Bear Market. While the Arab oil
embargo caused gasoline prices and inflation to increase, the uncertainty
caused by Watergate and President Nixons cover-up were the main culprits. The
Watergate hearings captivated the nation while raising grave concerns about
Nixon future as President and the integrity of the U.S. Executive branch of
government. That further destabilized the economy and financial markets leading
to an overall stock market decline of 51.9% during that 2-year Bear
Market.
Victor
opines that the 1974 bear market year was 90% due to Nixon and Watergate - not
higher inflation or the deteriorating U.S. economy. Gold was +66.57% in 1974 as it was (and still
is) a chaos and inflation hedge.
The
DJI hit a low of 577.6 on December 6th, which was -54.96% off
its closing high of 1051on January 11, 1973.
Given the significant market losses and the bleak economic outlook, Wall
Street firms were unlikely to be in a celebratory mood in late 1974. His
company (Ragnar Options Corp) was one of very few Wall Street firms to
have 600 people at a gala Christmas party in December 1974 to celebrate a great
trading year.
Victors
Conclusions:
The
U.S. equity market has risen nine consecutive days, while the FTSE (UK) is up
15 consecutive days. Bear market rallies
are the strongest in history and this one is proving to be unusually robust.
History
suggests that the Bear Market in U.S. stocks could lead to a deeper, longer
recession. When a recession follows a Bear Market, the economic contraction is
typically deeper and lasts longer with the path to recovery is slower. Since
World War II, nine out of the last fourteen bear markets were followed by
economic downturns-usually within about six months.
-->Victor
bought 40% of his desired short position in S&P 500 puts (a little below
the then current market price) on Thursday.
He has approximately 50% spot gold and silver with 50% Cash in T-Bills.
The
conclusion to this saga is completely up in the air. No one knows the outcome
or economic impact of Trumps tariff policies or what deals his administration
will negotiate with other countries.
Meanwhile, the Fed is staying pat on rates, presupposing outcomes like
tariffs are always inflationary, but that is pure speculation! We shall see
End
Quote:
There are known knowns. These are things we know that we know.
There are known unknowns. That is to say, there are things that we know we
don't know. But there are also unknown unknowns. There are things we don't know
we don't know.
.
Good
health, success, good luck and till next time
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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