In response to some key economic data that was released in the past couple weeks, I have decided to return to my intermediate-to-long term bullish outlook for the U.S. stock market after having neutralized my stance in mid-January. I expect the market to trend higher over the course of this year, although steep pullbacks could occur along the way.
Manufacturing (according to ISM) contracted again in February, but the rate of contraction slowed, almost to the neutral line.
The latest Empire State Manufacturing Survey showed a contraction that was slightly shallower than the prior month.
The most recent Philadelphia Fed Manufacturing Business Outlook Survey showed only slight contraction, holding steady from the prior month.
Atlanta Fed GDPNow’s Q1 forecast was +2.2% as of March 4.
Employment growth in February was moderately strong by the standards of the current recovery, with net job creation of +242,000 (according to BLS), +214,000 in the private sector (according to ADP), and the U6 unemployment rate ticked down to 9.7, after having held steady at 9.9 for two consecutive months (BLS).
So, what to make of all this data? Well, the weakness in manufacturing has been going on for almost a year now. If this were going to send the broad economy into recession, I would have expected employment growth to be falling sharply by now and the U6 rate to be rising. However, given that overall employment growth is still relatively strong a year into the economic slowdown, I take this to mean that the economic slowdown is not a prelude to recession. The Q1 GDP forecast is more evidence of this. And it seems that manufacturing (where most of the weakness is concentrated) may have started to stabilize.
So, with the economic backdrop appearing to be stable, I think the stock market will trend higher over the course of this year even if sharp pullbacks occur along the way due to weakness in certain areas of the economy, or further Fed rate hikes. The damage done to market sentiment over the past year has been enormous. I feel like the bearish camp got as crowded as it could be without a recession to double the capacity.
Soon I will also post an update on my application of George Lindsay’s Counts from the Middle Section for the current market situation. My previous projection (with a bull market top in December of this year) is still valid, although the recent market swoon opens up the possibility that the bull market will extend to late-2017. The latter projection would fit another long-term Lindsay pattern very well, which I will also discuss.