Financial markets declined 27% from market peak on January 4, 2022, to the market bottom on October 14, 2022. Equity markets have since regained nearly half of the peak-to-trough losses as of May 1, 2023. Should investors see this recovery as an “all-clear” for investing or might this be yet another bear market bounce?
In the midst of this rally, large bank failures of Signature Bank, Silicon Valley Bank and now First Republic Bank show obvious stress due to the economic slowdown. The failure of Silicon Valley Bank with $219B deposits marked the second largest bank failure in U.S. history. Now the failure of First Republic Bank on April 30 with $229B deposits marks a new second-largest bank failure, second only to Washington Mutual which failed in 2008 with $307B bank deposits. With many news headlines swirling around, the most important economic data announcements to monitor presently are the key pieces of information that economists characterize as forward-looking economic indicators.
Forward-Looking Economic Indicators To Monitor
There are several forward-looking economic indicators that are closely monitored by economists, investors, and policymakers to gauge the health of the economy and predict its future direction. Here are some of the most monitored indicators:
GDP is the value of all goods and services produced in a country and is used as a measure of economic growth. GDP is usually reported on a quarterly basis and is closely watched by investors and policymakers to understand the direction of the economy. On Thursday, April 27, 2023, the U.S. GDP Q1 report showed a gain of 1.1%, falling short of the 2.0% GDP growth expected by analysts.
GDP is the value of all goods and services produced in a country and is used as a measure of economic growth. GDP is usually reported on a quarterly basis and is closely watched by investors and policymakers to understand the direction of the economy. On Thursday, April 27, 2023, the U.S. GDP Q1 report showed a gain of 1.1%, falling short of the 2.0% GDP growth expected by analysts.
The employment report measures the percentage of people in the labor force who are unemployed but actively seeking employment. A higher unemployment rate can indicate a weaker economy, while a lower rate can suggest a stronger economy. On April 7, 2023, the Bureau of Labor Statistics released the Employment Situation Report showing very little change in March 2023. Unemployment remains at 3.5%, maintaining the trend of marginal shifts over the prior twelve months.
PMI is a survey-based indicator that measures the sentiment of purchasing managers in the manufacturing, construction, and services sectors. PMI readings above 50 indicate expansion, while readings below 50 suggest contraction. PMI in the United States rose to 47.1 in April 2023, up from a three-year low of 46.3 in the previous month and slightly above market consensus of 46.8. Economic activity in the manufacturing sector shrank for a sixth consecutive month.
CCI measures consumers' attitudes and expectations about the economy and their personal financial situation. A higher CCI reading indicates that consumers are more optimistic, which can lead to higher spending and economic growth.
The Conference Board Consumer Confidence Index® fell in April to 101.3, down from 104.0 in March.
Residential housing market activity contributes about five percent to the U.S. GDP each year. A higher number of housing starts can indicate growing demand in the housing market, which can contribute to economic stability and growth. The Existing-Home Sales data measures sales and prices of existing single-family homes for the nation overall. The existing-home sales fell 2.4% in March, down 32% from the 2021 peak of 6.5 million existing home sales.
The Leading Economic Indicators Index (LEI)
To culminate these data points and others such as retail sales, business inventories, industrial production, and trade balance, The Conference Board, a global, independent business membership and research association that provides economic data, analysis, and insights to leaders in business, government, and academia, has produced what is called The Leading Economic Index (LEI). This index is a composite economic indicator that measures the overall economic activity and predicts future trends in the economy. It is calculated by combining various economic data points into a single index number. A rising LEI indicates that the economy is expanding, while a declining LEI suggests a possible economic contraction.
Current LEI Results
The Leading Economic Index for the U.S. decreased 1.2 percent in March, marking a full year of consecutive declines. Negative contributions from most components largely offset increases from manufacturers’ new orders for nondefense capital goods excluding aircraft and manufacturers’ new orders for consumer goods and materials. Over the six-month span through March, the leading economic index decreased 4.5 percent.
Paul's Perspective
The risk of recession is high.
Investors must remain invested with some exposure to equities in-line with their long-term financial plan, but Provident Financial Planning does not have clients over-exposed to equities at this time. Will the market decline between January 4 - October 14, 2022 hold as the full peak to trough decline during this period of economic weakness? If so, the event would mark the first time since Black Monday 1987 that the stock market closed more than 20% from the recent peak without the declaration of a recession being widely agreed upon by economists.
The biggest risks to the market valuation are earnings and employment. Analysts are projecting 8.8% earnings growth in 4Q 2023, causing the CY 2023 earnings estimate to be positive 1.2%. This extremely optimistic 4Q outlook factors in normalization of inflation at the Fed's 2% target and factors in stable employment. Unemployment has remained unchanged since March 2022 but is likely to drift higher as 1Q layoffs face a challenging employment market. These changing economic conditions will continue to be monitored by Provident Financial Planning while we steward wealth for clients each and every day.
Make an appointment in Dallas, Houston, Southlake, or Plano for a free consultation with the Provident Financial Planning team of experts today!
Blessings,
Paul S. Michel, CFP®
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