Summary
- The signal-to-noise ratio is exceedingly high, with market volatility obscuring the underlying trend.
- Ignore the background noise of Trump policy flip-flops and focus on the effect of rising fiscal debt and long-term interest rates.
The S&P 500 is consolidating below 6000, a bullish sign. A breakout above 6100 would signal another advance, but the index has become a poor leading indicator of the economy. Instead, it is dominated by large passive investment flows into index ETFs, surges in liquidity, and the media cycle, which attempts to parse President Trump’s intentions by his daily sermon from the mount of Truth Social.
The bond market takes a longer-term view and is far more prescient than the equity market. Ten-year Treasury yields are gradually rising as international investors slowly withdraw, without wanting to trigger a panicked rush for the exits. Respect of the 50-week weighted moving average would signal another test of resistance at 4.75%.
The dollar is weakening, with the US Dollar Index testing the band of support between 98 and 100. A breach of 98 would warn of another decline, confirming our target of 90.
Gold is in a strong uptrend, reflecting the same outflow from US capital markets, with a bullish consolidation below 3400 on the weekly chart below. Breakout above 3500 would strengthen our target of 4000 by the end of 2025.
Consumers
A rebound in consumer confidence buoyed stocks, but the May reading of 98 remains in the same range as the 2020 COVID pandemic.
Consumer expectations rallied to 72.8, but remains below the threshold of 80, which typically warns of a recession ahead.
Economy
Manufacturers’ new orders for non-defense capital goods, excluding aircraft, were below their 2022 peak, at $74.8 billion in April.
That seems pretty healthy, until we adjust for inflation. The chart below, adjusted by the producer price index for capital equipment, warns of a sharp decline in new orders that could easily reach its 2008 low if current instability continues. Corporations are likely to defer decisions on new capital spending until there is a stable outlook.
Conclusion
Ignore the background noise of policy flip-flops and focus on the underlying signal in capital markets. Heightened uncertainty has triggered a steady capital outflow. If you destroy a brand—the USA bastion of democracy and economic stability—it is practically impossible to restore it.
The situation is aggravated by corporations deferring orders for new capital equipment because of the uncertainty. Declining capital investment is likely to tip the economy into recession.
Acknowledgments
- The Conference Board: Consumer Confidence
- Federal Reserve of St Louis: FRED Data
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients.
Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter.
Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.