Timing The Late Cycle

The Other Model Indicators

Let’s take a look at the indicators in the macro model to see whether the stock market is overvalued and if the economy is late in the cycle. In my opinion, many of the indicators are distorted making this model a talking point rather than actionable advice.

I skipped the consumer confidence indicator in the previous post. As you can see, the indicator is at 89%. Both the consumer confidence and the small business confidence indexes can be used as contrarian indicators when they get very high or very low. As you can see from the chart below, the monthly report has recently fallen sharply. The biggest drop occurred in the expectations index in December which is when the tax plan came out. You would think the consumers would be happy with the tax cut, but there are polls which show the consumer has approved of tax hikes in the past more than this tax cut. The small businesses, on the other hand, love this plan. I expect the consumer sentiment to pick up again in the next few months when most realize they will save money. That could be the final burst in sentiment for this cycle. It’s also surprising to see any pessimism with the stock market doing this well. The issue with using consumer sentiment as a timing metric is the fact that it has been around where it is now for the past 3 years.

The indicator which shows the number of quarters without a recession is high now because this cycle is the 3rd longest since the mid 1850s. This goes back to the discussion I had in a previous post where I was mentioning how some people don’t think a recession occurs because the cycle is old while others say debt builds up to the point where a deleveraging is necessary. Those who think a catalyst is needed to cause a recession have been correct in the past few years because this cycle has passed the average length. However, I wouldn’t use this as an argument to say there will never be a recession again. Monetary policy in 2019 will be hawkish which could cause a recession a year or two afterwards.