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Market check-up: 10 tests for US equities’ health in 2018

Charlie Reinhard

By Charlie Reinhard

Head - NAM Investment Strategy

November 14, 2017Posted InEquities

1. Leading Economic Indicators: Both US and global leading indicators of economic activity point to continued growth ahead. The US labor market is tightening and manufacturers are ramping up production after hurricane-related troubles. Prognosis: healthy.

Figure 1: US and Global Leading Indicators

Source: Bloomberg October 2017


2. Global PMI Surveys: The most cyclical part of the global economy is expanding, and will see businesses benefiting from increased activity. Prognosis: healthy.

Figure 2: Global Manufacturing PMI

Source: Bloomberg October 2017

3. Citi Financial Conditions Index: Financial conditions, the mechanism by which financial markets impact the real economy, are conducive to further growth. Prognosis: healthy.

Figure 3: Citi G4 Financial Conditions Index

Source: Bloomberg October 2017

4. S&P 500 Advance-Decline Line: Towards the end of previous bull markets, the market has often reached new highs without its advance-decline line doing the same. This occurs because market leadership becomes concentrated among a few large stocks, while many smaller stocks are declining. For now, the advance-decline line is rising alongside the market. Prognosis: healthy

Figure 4: S&P 500 Cumulative Advance-Decline Index

Source: Bloomberg October 2017

5. US Treasury Yield Curve Slope: Historically, an inverted yield curve has appears before a recession. Today, Fed tightening has flattened the curve but it is still far from inverted. Prognosis: healthy.

Figure 5: US Treasury Yield Curve Slope (2Y10Y)

Source: Bloomberg October 2017

6. Vix Index: The Index, which shows investors’ expectation of 30-day volatility as implied by S&P 500 index options, is currently at low levels. This is a good sign as the index tends to follow the yield curve inversely by around two years. Prognosis: healthy.

Figure 6: VIX Index

Source: Bloomberg October 2017

7. Corporate Bond Spreads: Widening spreads have often warned of coming financial distress. But spreads have yet to turn up and we remain overweight credit. Prognosis: healthy.

Figure 7: Corporate Bond Spreads

Source: Bloomberg October 2017

8. Canadian Home Prices: Policy tightening to cool the hot Toronto and Vancouver markets has not yet spilled over into the wider economy. Prognosis: neutral.

Figure 8: Canadian Home Prices

Source: Bloomberg October 2017

9. WTI Oil Prices: Crude prices have been stabilizing near $50 per barrel, having recovered from the drop that led to a setback in corporate profit growth and higher credit spreads several quarters ago. However, it is not high enough to risk inflation or an economic downturn.  Prognosis: healthy.

Figure 9: WTI Crude Oil Price

Source: Bloomberg October 2017

10. S&P 500 Forward 12-Month Earnings: Are at an all-time high, as energy sector prospects have improved. Leading indicators point to continued growth ahead. Prognosis: healthy

Figure 10: S&P 500 12-Month Forward Earnings

Source: Bloomberg October 2017

This is an excerpt from the North America Investment Strategy: Trade, Taxes and Ten Signposts for 2018 update by Charles L Reinhard dated 26 October 2017.

An investor cannot invest directly in an index. They are shown for illustrative purposes only. Past performance is no guarantee of future returns. Real results may vary. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events.

Figure 3 note: Citi G4 Financial Conditions Index uses a number of variables including money market rates, debt and equity index prices, and other financial indicators to provide a summary of the “health” of financial markets. Financial conditions are the mechanism by which financial markets impact the real economy; in other words, a higher value for the FCI indicates that credit conditions and individual wealth are improving, which is supportive of economic growth.

Figure 4 note: the S&P 500 Advance-Decline Index is a measure of market breadth, and is calculated as a running total of the number of stocks in the S&P 500 increasing minus the number declining in a given day.

Figure 6 note: the VIX index is a popular measure of the stock market’s expectation of volatility implied by the S&P 500 index options, calculated and published by the Chicago Board Options Exchange.

Figure 7 note: OAS means the option-adjusted spread