NEWS
What Happened Last Week
Investor sentiment has turned bearish in the past few weeks, indicating 40%+ investors expect a bear market at some point in the next six months.
As of Friday, the 10-year US Treasury yield is 4.42%, whereas the 3-month yield is 4.32%. The fact that the 10-year yield is above the 3-month yield is generally viewed as a positive economic signal.
The Composite Purchasing Managers’ Index (PMI) fell from 52.7 in January to 50.4 in February. That was driven by a drop to 49.7 in US Services and a rise to 51.6 in US Manufacturing. Above 50 indicates economic expansion.
The US Leading Economic Index (LEI) has been falling since 2022, but it’s most recent 6-month period only fell by 0.9%, whereas the 6-months prior to that fell 1.7%.
How I See It
Bear markets happen when the majority anticipates an upcoming economic recession.
That’s why it’s important to keep an eye on leading indicators and compare them with how investors are feeling.
Sentiment can swing quickly and dramatically. Fundamentals underlying the economy are usually much less sudden, gradually deteriorating in the lead up to an actual bear market.
There are exceptions, of course, like when the world gets hit by COVID-19 suddenly. But even that resulting bear market was over in a flash, behaving much more like an oversized correction.
But as I look at the data, the state of the world appears to be on par largely with expectations.
People are leaning pessimistic at the moment for several reasons. A lot is happening in the attempt to streamline systems, and that creates uncertainty.
One red flag has appeared, however, in that the US Services PMI has dropped below 50. But that has been counterbalanced by improvement in manufacturing, so it’s a wait and watch sort of scenario.
A great positive is that, even though we’ve long expected the slowdown of the US economy, the leading indicators show that the rate of slowdown has been leveling out. In other words, the risk of too much slowdown, resulting in recession, has declined.
The Conference Board, a global, non-profit thinktank which measures these LEI indicators, stated that this signals “milder downside risks to growth.”
With investors largely feeling bearish, a reasonably healthy growth outlook, and room for the Federal Reserve to implement further monetary policy, I believe the US market still has room to grow this year.
I believe the risk of a correction in the market (down 10%-20%) is quite high at the moment, but in terms of long, extended downturns…not likely, in my opinion.