Hi I'm Jimmy in this video.
We're going to do a quick review of
where the US economy stands to
see if we can use various economic
indicators and information like
that to try to determine if a
recession is coming soon.
And in theory a meaningful pullback
in the stock market.
Or is the economy moving
along decent enough.
And will the stock market move
higher. This is the second video
in our quarterly economic analysis
series. So there are some economic
indicators which generally do a good
job of looking at where the economy
is at. And some that are good for
predicting where the economy will
go. One of the leading economic
indicators is housing.
Now we've looked at a lot of these
charts in the last video that we did
in our economic analysis series.
So if you're interested in seeing
that or if you're curious more about
how we started this.
Well there's a link in the description
below to that video.
Okay. So this is a chart of housing
starts and basically housing
starts looks at how many new houses
are being built.
Often times a strong housing demand
can lead to a robust economy as more
houses are being built more people
buy furniture they buy appliances
things like that.
So in theory a strong
housing market should lead
to a stronger overall economy.
Now in our last video this is where
housing starts were and this looks
like a pretty big drop off at that
time.
And although I do want to point out
how volatile this indicator actually
is now the early signs were
that this was negative but we wanted
to see where it went.
In the meantime we had marked this
as a negative for the economy
but frankly now I'm not so
sure.
I don't think it's a positive
because really what we're looking
for is this to me this looks more
like it's flattened out here at the
top.
But I'd have trouble saying that
this is either a positive or a
negative thing for the economy.
So on our handy scorecard here
we're going to mark mark this one as
neutral.
This gray area in the middle.
We're considering this neutral for
now. OK. Moving on.
Our next economic indicator is the I
assume manufacturing PMI
index. You might also hear this
called The Purchasing Managers
Index. Basically this
economic indicator tracks the
changes in production levels
from month to month in the
manufacturing sector.
So in theory better manufacturing
better so a stronger economy.
So this is the chart from three
months ago.
And as we could see it wasn't
looking too good.
Well since then things have gotten
worse. So if we jump back to
our scorecard.
Well on our scorecard we had
this as a point for the Bears
and it seems that our updated
data has confirmed that this is a
negative sign for the economy right
now. OK. Up next we have
unemployment now.
Unemployment is not a leading
economic indicator but
I do think it can do a good job of
helping us paint a picture of where
the economy stands right now.
So in our last video called
should I invest now or wait until
later. Well I got a lot of pushback
on unemployment so much so
that I actually did a video
specifically on unemployment.
And if you're curious about how
unemployment works are looking at a
deeper dive of what goes behind
on the unemployment number.
Well there's a link in the
description below to that video.
But here's the long and the short of
it. Last time I showed a chart like
this and I said something
along the lines of unemployment
is low.
So that's a good thing for the
economy.
And I suppose it's not terribly
surprising. But I got a lot of
pushback saying well if
unemployment is low it has to rise
and therefore that's a negative for
the economy.
And yes it will absolutely go back
up which is a bad thing for the
economy.
But the question is when.
Now if we were to switch to a
shorter term unemployment chart.
Well I agree that it's unlikely
that unemployment will continue to
fall. But there is another
possibility and that possibility
is that unemployment could trend
sideways for at least a little bit.
And in theory once we hit
full employment well
wages should rise
at a faster pace.
And if we overlay wage growth on top
of this chart well we can see
that this the exact thing that's
been happening as unemployment
has fallen well wages
have begun to rise at a faster
pace.
That alone could help push the
economy forward. They don't
necessarily need falling
unemployment a stagnant unemployment
with rising wages could essentially
do the same thing.
Now unemployment once again is
not a leading economic indicator.
So I think we should limit how
much we weigh this into our decision
making ability our into our decision
making process.
But I do think it makes sense to
consider where unemployment's at
and consider the fact that wages are
rising. OK.
So jumping back to our scorecard
here. I think unemployment gets a
check for the bulls.
So if we had a green check mark one
point for the bulls.
OK. Next we have consumer confidence
now where unemployment is not
a leading economic indicator.
Consumer confidence is
now just to illustrate that this is
a chart of consumer confidence
leading up to and into the Great
Recession.
This line right here.
This is the high of the S&P
500.
And as we can see consumer
confidence was hesitating
a bit leading up to it.
And it looked like it had started to
trend lower.
Right when the market was hitting
its high. And if you're unsure about
the. Gretchen at that point for
consumer confidence well perhaps we
would have been more convinced when
consumer confidence continued to
fall from above 90 to
below 60.
And if we'd reacted at that point
well right there the market
was down about 17 or 18 percent
compared to its eventual fall of
more than 50 percent.
Well fast forward to today and
here's what today's consumer
confidence looks like in just so
we're on the same page.
This index is actually called
the Michigan Consumer Sentiment
Index and basically its
goal is to capture the mood of
consumers as far as their economic
well-being and their outlook.
So compared to pre great
recession levels it seems that this
indicator looks quite good.
Now would jump over the yield curve
or more accurately put the inverted
yield curve so the inverted
yield curve is a key indicator.
And I actually did a video just
recently on this topic.
And if you're interested it could
be worth the time because
the yield curve has been inverted
for a while. This footage was
actually taken from that video.
The link below if you're interested.
But currently the yield curve
remains inverted and
we know that because the three month
Treasuries are paying a higher yield
than the 10 year Treasury bonds.
And as we pointed out in all of the
inverted yield curve videos that
I've done well this is a big
deal because all U.S.
economy recessions have
been preceded by an inverted
yield curve.
Now not all inverted yield curves
have led to recessions but this
simply shouldn't be ignored.
This is absolutely a point
for the Bears so we'll mark
that down chart here.
So our final indicator isn't really
an indicator at all.
In fact it's the ETF money
flows. So basically we
look at how much money how much net
money so money body and money sold
out how much was remaining how much
has gone into or out of
different ETF from different types.
So I took a universe of about 350
of the largest ETF.
And then we looked at how much money
went in and out of each of those
funds over the past few years
I figured that if we can see
actual money where's that actual
money being invested.
Perhaps we can use that to guide
us to to recognize at least
what the big money is thinking.
So here the flows for 2017 2018
and 2019 now we're almost halfway
through 2019.
So I'm actually going to double up
the 2019 numbers just to make
them a bit more comparable to the
two other groups.
Now what interests me the most is
not that these
numbers are trending lower but
it's how they compared to each
other. So the fact
that they're trending lower could
easily be related to the fact
that they're more ETF available in
2019 than they were in 2017.
And I kept the universe the same for
all three years just to take us
of a sample size.
The biggest thing that jumps out at
me with this chart is the fact that
fixed income took in more money
than equities in 2019
now. Fixed income as bonds.
So basically this is important
in my eyes because this implies
that a lot of big money is
looking for safety which
would imply that there is
a hesitation about investing in
stocks right now.
And if we dive deeper into just the
bond categories Well there we
can see that government bond
investments are way up in 2018
and 2019 compared to 2017.
They're the green bars and
this actually confirms the belief
that there is at least a partial
flight to safety happening right
now. And just so on the same
page with this chart I actually
doubled the 2019 numbers just
like I did to make up for the fact
that only halfway through the year.
So it's an estimate but either way
the point remains the same.
So my opinion is that it appears
that things are a bit more negative
this time than they were a few
months ago when we did the video
last time.
Now I don't like the fact that the
yield curve is inverted and remains
inverted for as long as it has.
I think that's a negative.
The trade tensions can't be helping
manufacturing and we should watch
housing starts to see
which direction that goes.
Once again I'm landing in the same
spot pretty much maybe a bit more
hesitant than last time as I was in
the last video.
And that is that we should remain
fully invested.
But I think it makes sense to hedge
our portfolios if we haven't done so
yet. Now if you're curious
about seeing a video on how to hedge
your portfolio let me know in the
comments below I'd be happy to do
something like that.
And basically it's time to take a
defensive stance a safety sense
but what do you think.
Do you think that the economy is
going to get stronger or weaker
over let's say the next 12 months or
so. Are you fully invested.
Do you think that we should hedge
our portfolios.
Let me know what you think in the
comments below.
And don't forget I'll be updating
this series every quarter from now
on. And if you're curious to see a
hedging video let me know in the
comments below. So if you haven't
done so yet hit the subscribe
button. Thank you so much for
sticking with me all the way into
the video and I'll see in the next
video.