Market Update: April 29, 2022

Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.

 

The market pulled back again this week and a short-term pattern has emerged. It appears that the market is trading in a large, sideways consolidation pattern as the market digests news on whether or not the Federal Reserve can successfully control inflation without forcing a recession.

In the news this week, economic headwinds in China have forced regulators to ease back on new rules for Chinese Tech firms. The US consumer increased spending by 1.1% in March. The largest increases were in the services portion of the economy. And Amazon’s online-shopping business showed limited growth on the quarter.

The last 2 weeks, I highlighted the rising odds of a recession and many economists including Goldman Sachs are in agreement. I reviewed a few less severe scenarios as well as several economic indicators that are raising red flags. This week, I will pose a counter-argument including several indicators that are not red flags.

The leading economic indicator, shown in blue here, is a composite of several economic indexes that can signal peaks and troughs in a business cycle. When this line moves below 0%, that usually precedes an economic downturn. There has been one false signal with this index back in 2016. Currently, the LEI is well above 0%, indicating that business is strong.

The 10 minus 3 treasury yield spread has been a great indicator in the past for imminent recessions. When this spread falls below 0%, that indicates bond investors have serious concerns about the short-term economic conditions. Inversions of this curve have preceded the last 4 recessions. Currently, this curve is not only positive, but growing.

And finally, earnings from corporations are the life blood of the stock market and long term, stocks tend to follow earnings growth. As long as this graph moves up and to the right, then the corporations in the stock market remain profitable and stock prices typically respond in kind. This graph has continued to grow through the volatility but might have started to move sideways these last few days with the results from quarter 1 earnings.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved April 29, 2022, from FactSet Database.

2.The Conference Board. “US Leading Indicators,” Leading Economic Indicator, YoY % Change. Updated April 21, 2022. Retrieved from https://www.conference-board.org/topics/us-leading-indicators

3.Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity [T10Y3M], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/T10Y3M, April 28, 2022.

4.FactSet Research Systems. (n.d.). S&P 500 NTM EPS (Interactive Charts). Retrieved April 29, 2022, from FactSet Database.

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