Economic indicators are changing. The US markets are moving out of a distribution phase consisiting of lateral movements and indecision in market sentiment: will it result in a mark-down and in a recession?
The US economy is still not heading to a recession. However, various macro signals and economic indicators imply a slowdown:
- the property market has reached its highest
- gold is running again
- unemployment is growing
- the PMI index is decreasing
- commodities are slowing due to the impact of the trade war
Notwithstanding, sector rotations are now a reality and the consistent pick-up of Utilities and Consumer Staples (up more than 10% from January 2019) means the financial cycle is well beyond its peak. The yield curve suggests much more than an adjustment:
Correlations between equities and bonds have varied dramatically over the last 10 years, ranging from approximately -0.8 to 0.2. However, when looking at how stocks are cheap or expensive relative to bonds, it seems that the era of zero rates has modified the long-term level of their ratios. Accordingly, the slow-down is bringing valuations towards a new normal (but higher) level.
Thus, we may conclude that the market top has been already reached by US stocks and that a defensive move is more than appropriate if not already taken.
References
CAPE. Retrieved from http://www.econ.yale.edu/~shiller/
Treasuries Yields. Retrieved from https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019
Monitoring the Economy. Retrieved from https://home.treasury.gov/data/monitoring-the-economy