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A Market of Contradictions
Evaluating future market direction is never an easy task, but in recent months it has become increasingly difficult due to the stunning number of contradictions we are seeing in economic conditions and data. Here are some examples:
According to the JP Morgan Global Manufacturing PMI, the global manufacturing sector contracted for the sixth consecutive month in October. Manufacturing weakness is generally associated with recessions, as manufacturing historically has led the overall economy. On the other hand, the NAHB Housing Market Index, which reflects U.S. homebuilder confidence, hit a 20-month high in October and is well into expansion territory. Generally, homebuilder confidence drops towards contraction territory prior to a recession, suggesting one is not around the corner.
U.S. consumer spending is poised to grow in 2019 at its lowest year-over-year level in six years, while U.S. consumer optimism as measured by the Conference Board’s Present Situation Index hit its highest level since November 2000 in August.
Central banks are cutting rates and reintroducing quantitative easing as if an economic recession has already begun. All of this is taking place while unemployment rates are essentially at 50-year lows in the U.S. and Canada.
While plummeting bond yields traditionally suggest that the bond market fears a recession, record highs for major North American stock markets suggest that not only one is likely nowhere in sight, but that economic growth should accelerate in the coming quarters.
These economic cross-currents represent a potential fork in the road for markets and it is difficult to know which direction they will ultimately choose to go. As a result equity investors should proceed with some caution.