“Retailers Power US Stocks back from the Bear Brink,” Bloomberg reported Dec. 26. That may be technically correct, depending on their calculus, but it will lead many to a false conclusion that stock market worries are in the past and the US is a “go” for solid economic growth in 2019.
December has been an incredible month in the Standard and Poor's 500 (S&P 500), with a breathtaking 15.3% drop off the September 2018 record high, and a November-to-December drop of 10.6%. The decline since September is the second-steepest since WWII (1987 was steeper), and the one-month drop in December was the steepest since 1931. It is no surprise that US Treasury Secretary Steven Mnuchin went on tour to calm down the financial community. December is likely an ominous warning of what the business community can expect in 2019.
The S&P 500 12/12 rate-of-change will lead the US Industrial Production Index 12/12 through highs and lows by a median of three months. The declining trend in the S&P 500 12/12 is expected to last through at least the next few months, as even record-steep month-to-month increases in January and February would not prevent either the 3/12 or the 12/12 from moving lower. January 1987 and February 1931 posted increases of 13.18% and 7.63%, respectively, and we think it is unlikely that anything close to that will occur in the next two months, based on other leading indicators as well as our outlook for corporate profits. The decline in the stock market 12/12 means we are on track with our general forecast for softness in US GDP growth and mild decline in the US Industrial Production Index in the early stages of 2019 and likely extending through the year.
And as far as consumer activity…
December data is not available, but the pre-December input is not all that encouraging. Retail Sales (without automobiles) were 5.8% above year-ago levels through November; the deflated growth rate is a noticeably milder 3.3%. The 3/12 is declining below the 12/12, and the 12/12 has established a tentative October 2018 peak. These ITR Checking PointsTM suggest that the business-cycle momentum has shifted to the back side, and a slower rate of growth is probable as we head into 2019. We are anxiously awaiting the official December results (both brick-and-mortar and online) and will report on those in a near-term blog. For now, the takeaway has to be caution with regard to slowing growth in consumer activity – and thus more downward pressure on the economy at large – in 2019.
Alan Beaulieu
President