ITR Experts Say: Loaded for Bear

In December, the US stock market flirted with bear-market territory (typically defined as a 20-percent drop from a prior peak) before a meek rally closed the month, reeling it back from the edge.

Now that the month is finalized, let’s look at how bad it really was:

• The S&P 500 finished December 2018 down 6.2% from the December 2017 level, the harshest month-over-month drop since early 2016.
• The S&P 500 monthly data trend ended 2018 lower than it opened, posting the worst calendar-year decline for the US stock market since 2008.
• The just-recorded month-to-month drop of 9.2% was the second-sharpest November-to-December decline on record. The sharpest? 1931 – not good historical company to keep.

Unfortunately, it does not appear that the stock market has turned the corner with the new year. At the time of this writing, the market is sliding further on news that Apple has slashed its quarterly guidance for the first time in more than a decade.

It is important to differentiate the stock market from the macroeconomy itself. The actual economy is typically measured by US Industrial Production or US Gross Domestic Product, which are more reflective of the conditions that business leaders will be navigating in 2019. That is not to say that the stock market is irrelevant, only that it does not always accurately depict what is happening on the ground.

We tend to view the S&P 500 as a leading indicator for what is to come. With the flurry of negativity in recent weeks, the US stock market has definitively joined the chorus of our other leading indicators that are signaling a coming shift in the macroeconomy in 2019.

One of our favorites, the ITR Leading Indicator™, confirmed as much with an equally ominous drop in December. The declining trends in the ITR Leading Indicator monthly data and the S&P 500 1/12 rate-of-change are supporting our outlook for deceleration in the macroeconomy in 2019.

Business executives need to load up and prepare for a more turbulent year ahead.

Connor Lokar
Economist