S&P 500: Expect slower earnings growth but no sign of recession

Credit growth in the US above 5% shows no signs of tighter credit conditions from an inverted yield curve. Growth in the broad money supply (MZM plus time deposits) has also not slowed, remaining close to 5%.

Credit Growth and Broad Money Supply

Growth in hours worked has slowed to 1.71%, suggesting that real GDP growth will dip below 2% in 2019 but remain positive.

Hours Worked and Real GDP growth

The Fed is unlikely to cut interest rates when average hourly earnings are growing at 3.2% (Total Private for the 12 months ended March 2019).

Average Hourly Wage Rate

The Leading Index from the Philadelphia Fed fell below 1%, giving an early warning that GDP growth will slow.

Philadelphia Fed Leading Index

A similar dip below 1% occurred ahead of the last three recessions. A second, stronger dip would warn of recession ahead.

Philadelphia Fed Leading Index

The S&P 500 is advancing to test resistance at 2950/3000, while the Volatility Index crossed below 1%, signaling that risk is no longer elevated.

Treasury Yields

Real GDP is likely to slow this year but remain positive. S&P 500 earnings growth is expected to slow and the index is likely to meet stubborn resistance at 2950/3000. The Fed is still a long way off cutting interest rates (a strong bear signal) and there is no sign of recession on the 2019 horizon. An extended top is the most likely outcome.

ASX 200 spikes but will it last?

The reason for the upward spike in the ASX 200 is clear. While shortage in iron ore supply may be temporary, while Brazil reviews mine safety, it is sufficient to cause spot prices to jump 20% in the last week.

Iron Ore

Windfall profits are likely to benefit not only the Materials sector but the entire economy over the next few months. The ASX 200 Materials Index ran into resistance at 12500 while a bearish divergence on Money Flow continues to warn of selling pressure.

ASX 200 Materials

The ASX 200 broke resistance at 6000 but remains in a bear market. Reversal below 5650 would signal a primary decline, with a target of the 2016 low at 4700.

ASX 200

ASX 200 Financials Index rallied on release of the Royal Commission on Banking final report. The outcome could have been a lot worse, or so the market seems to think.

ASX 200 Financials

I suspect the bank rally will be short-lived. Credit growth is falling and broad money warns of further contraction.

Australia Credit and Broad Money Growth

House prices are falling and concerns over a slowing economy have caused many to call for further rate cuts. I believe this is short-sighted.

Australia House Prices and Household Debt

One of the biggest threats facing the economy is ballooning household debt. Tighter credit and falling house prices are likely to curb debt growth….provided the RBA doesn’t pour more gasoline on the fire.

I have been cautious on Australian stocks, especially banks, for a while, and hold more than 40% in cash and fixed interest investments in the Australian Growth portfolio.

ASX 200 bear rally

Credit growth in Australia is falling (with help from the Royal Commission) and broad money growth is anemic, below the lows of the GFC, warning that the economy is close to a contraction.

RBA: Credit & Broad Money

Banks are particularly vulnerable because of the falling housing market. The bubble threatens to burst after a long expansion and the RBA is low on ammunition. How many rate cuts do you think they have left in reserve?

The ASX 200 Financials Index is testing long-term support at 5400. Declining Momentum peaks warn of a bear market. Breach of support is likely to lead to another decline, with a long-term target of 4000.

ASX 200 Financials Index

The Resources sector is in far better shape but the ASX 200 Materials Index is also slowing, with a strong bearish divergence on 13-week Momentum. Reversal below primary support at 11000 would confirm a primary down-trend.

ASX 200 Materials

The ASX 200 is testing resistance at the former band of primary support between 5650 and 5800 (revised up from 5750). The rally could go further, possibly as high as 6150, but this is a bear market and the probability that this rally will change that is low. Respect of resistance is likely and reversal below 5650 would confirm the bear market for Australian stocks. Initial target for a primary decline is 5000.

ASX 200

Our hope is that China rescues us with another massive stimulus spend,  as in the GFC, lifting the resources sector. But hope isn’t a strategy.

I have been cautious on Australian stocks, especially banks, for a while, and hold 40% cash in the Australian Growth portfolio.

ASX 200: Miners rally but banks a worry

The ASX 200 found support at 6120/6150, with a long tail indicating buying interest. Follow-through above 6250 would suggest another advance. Breach is now unlikely but would warn of a test of the rising long-term trendline at 6000.

ASX 200

A rally on resources stocks helped support the overall index. Expect the ASX 300 Metals & Mining index to test 4000.

ASX 300 Metals & Mining

Miners were helped by a weakening Aussie Dollar. Breach of support at 71 US cents offers a target of 69 cents. Trend Index peaks below zero warn of strong selling pressure.

AUDUSD

Banks, on the other hand, are weakening. The ASX 300 Banks index  broke support at 7700, with a declining Trend Index warning of selling pressure. Expect a test of primary support at 7300.

ASX 300 Banks Index

Falling broad money and credit growth warn of a contraction — unless an unlikely Chinese-led mining boom can keep the wolf from the door.

Broad Money and Credit Growth

House prices are falling.

House Prices

Returns on bank equity are declining due to increased capital requirements, lower credit growth and narrow margins.

Banks Return on Equity

I remain cautious on Australian stocks, holding over 30% cash in the Australian Growth portfolio.