Bear Market - Weak Richmond Fed Survey

The Richmond Fed index fell from 29 in September to 14 in October. This missed the consensus for 24 and the lowest estimate which was 16.

Weakest component was shipments which fell from 33 to 7. The volume of new orders fell from 34 to 20.

There aren’t quotes included in this report, so we can’t be sure what caused this decline. It’s probably related to tariffs. Even with that weakness, the capacity to utilization index was flat at 20.

Local business conditions fell from 27 to just 8. Capex spending fell from 29 to 21 and equipment and software spending fell from 20 to 16.

Wages fell from 33 to 28, but the number of employees fell from 19 to 16. The availability of skills needed fell from -11 to -22. This shows how tight the manufacturing labor market is.

There is a worker shortage. The most shocking part of this report is the prices paid index increased from 3.47 to 5.68 and the prices received increased from 1.93 to 2.84.

This spike shows how volatile this index can be. It has a small sample size as only 76 firms participated.

Bear Market - It would be silly to be bearish on manufacturing when the Empire Fed and Philly Fed readings were both solid.

On the other hand, the Chicago Fed national activity index fell from 0.27 to 0.17 in September. That’s also a volatile report as the August reading was revised from 0.18 to 0.27.

The Richmond Fed index brought down the ISM PMI projection from the average of the regional surveys to 56. That would be a continuation of the cyclical decline in the index. Personally, I give the September industrial production report way more credibility than any of these surveys.

The expectations index looks better. Shipment expectations increased from 43 to 49. The volume of new orders increased from 37 to 43. Local business conditions were up from 32 to 37.

As you can see from the chart below, the expectation for capex was up from 29 to 38. That was one of the best readings since 1997. Spending on equipment and software was up from 23 to 28. The employment readings were wild. Number of employees index was up from 23 to 33. Wages were up from 45 to 59.

The availability of skills needed fell from -12 to -25. Inflation readings weren’t as volatile as the current readings. Expected prices paid index was up from 3.04 to 3.87. Prices received increased from 2.37 to 2.66.

Bear Market Signposts Update

Investors are trying to figure out if this correction in stocks in October signals a bear market is coming. I think there is still a few months left in this bull market.

Technically, a forecast’s timing depends on whether you say bear markets start at the peak or after the stock market falls 20%. Both choices have problems.

If you say bear markets start at the peak, anyone can claim the stock market is in a bear market at any time unless stocks are at their cycle high.

Personally, I find it ridiculous when bears claim stocks are in a bear market after a normal correction. They should predict a bear market rather than claiming every correction already is a bear market.

That scares people out of profiting from bull runs by buying the dip. If you say bear markets are only after stocks have fallen 20%, by the time the moniker is issued, the declines are mostly done for many bear markets.

Bear Market - Regardless of the intricacies of the definitions, investors are trying to time the next big decline in stocks.

One way to do so is to look at the Bank of America Merrill Lynch bear market signpost list. On September, 13 out of 19 signposts were triggered.

As you can see from the table below, now 14 are triggered. This percentage of signposts was reached earlier in the year as well. 13 were triggered at the time of the peak on September 20th.

The VIX being over 20 is a new trigger. “Trailing 12-month S&P 500 returns above 11%” has been taken off the board as a trigger. Bullishness in the Conference Board survey being above 20 is a new trigger. The rest are the same.

(Click on image to enlarge)

According to Bank of America, when a similar percentage of signposts are hit as compared to the current amount, there is an average of 21 months until the bull market peaks.

Even though that sounds somewhat bearish, that’s hugely bullish. That is, compared to the current sentiment as many are ready to throw in the towel on this run. 4 out of 7 bull markets have peaked with 100% of the indicators triggered.

The problem is there were fewer signals in past cycles. For example, in November 1968 there were only 5 signals. In March 2000 there were only 17 signals. The only cycle with all 19 signposts was the last one.

Bear Market - The Impact Of Tariffs On GDP

The economy in the first half of 2018 was able to bear the brunt of the tariffs. They were small and the economy was riding high on the back of the fiscal stimulus.

In the 2nd half of 2018, GDP growth doesn’t look as great. Tariffs are starting to kick in and growth from the stimulus is wearing off. Plus, the global economy is weakening and the Fed is hiking rates quicker. 2019 will be even worse because President Trump plans to raise the tariff rate to 25% at the start of the year.

As you can see from the chart below, the tariff is expected to hurt GDP by 1%, with the 25% tax on auto imports having about half of the impact.

1% doesn’t seem like a huge impact at first glance. However, GDP growth probably would have only been about 2% in 2019 considering the slowdown. This darkening outlook on 2019 might be the catalyst for the stock market volatility in October.