Stocks Outlook - Wednesday, Sept. 26

The economy and stock market move in the same direction in the medium-long term. Hence, leading economic indicators are also leading indicators for the stock market.

Thoughts

Corporate profits continue to trend higher. A medium term bullish sign for the stock market.

The economy is getting close to full-employment. The economy and stock market still have some room to run, but not a lot.

China is unlikely to dump U.S. Treasuries to hit back at the U.S. during this trade war.

Energy has gone up 11 days in a row.

1 am: Corporate profits continue to trend higher. A medium term bullish sign for the stock market.

Corporate profits are still trending higher, even after adjusting for inflation.

This is a medium term bearish sign for the stock market. Historically, corporate profits (inflation-adjusted) tend to go down for a few quarters before an equities bear market or “big correction” begins (see study)

1 am: The economy is getting close to full-employment. The economy and stock market still have some room to run, but not a lot.

Many traders like to guess when the unemployment rate will bottom and start to tick up. This is a silly exercise and waste of time. Any guess is just a guess – nothing more. A better measure of “full employment” = Unemployment Rate – CPI (inflation). As you can see from the following chart, this data series tends to approach 0 towards the end of an economic expansion and equities bull market.

The Unemployment Rate – CPI is currently at 1.21%, which means that:

The economic expansion and bull market are not over, but…

We are near the last leg of this bull market.

*The economy and stock market move in the same direction in the medium-long term.

1 am: China is unlikely to dump U.S. Treasuries to hit back at the U.S. during this trade war.

China has sold some of its U.S. Treasury bonds recently. However, it’s unlikely that China will aggressively dump its bonds in an attempt to hit back at the U.S. in this trade war.