S&P500 Problems Not Yet a Crisis
NEW YORK – November 19, 2018
The US S&P500 index, which reached a record 2940 points in September, fell sharply to 2603 points in October (-11.5% of the highs). The shares of high-tech companies fell first of all, as well as other USindexes.
Is this the beginning of a full-fledged crisis as in 2008? The external background supports such theories: There’s the rise of rates by the Federal Reserve, the compression of the monetary base in the US, and trade wars.
But some important indicators suggest that this is a correction rather than a full-fledged crisis.
The first indicator isthe US’s GDP.
The above graph shows that over the last 35 years,US GDP growth slowed before a recession. Now the GDP is growing steadily, and the pace of its growth is accelerating. That doesn’t look like a coming crisis.
Another indicator is the difference in yield (spread) between risk securities in the US, on the one hand, and reliable government bonds on the other.
Simplifying a bit: This index tells us how much of the extra yield sellers of risky bonds should promise investors to prefer them to government bonds.
Since 1989, Merrill Lynch (now-BofAML) has been calculating one such index. For ease, we will call it the spread index. During all previous S&P500 index falls, the spread index increased sharply.
You can even formulate a kind of rule: An economic crisis occurs in the US if the spread index rises above 5%. An additional convenience is that the spread index is calculated on a daily basis.
Here are examples of how this has worked in the past.
In 2015-2016, the S& P500 fell from 2103 in May 2015 to 1902 in February 2016. What did the spread index tell us about this? From July 21 (S&P500 closed that day at 2119 points), the spread index rose above 5% and held steady there for several months until September 2016.
In 2011, the S&P500 fell from 1341 in May to 1158 in September. The spread index rose above 5% fromMay 26 (the S&P500 closed that day at 1325 points).
In 2007, the S&P500 fell from 1539 in October 2007 to 766 in March 2009. The spread index set off the alarm in November 2007 when it rose above 5% starting on November 9, 2007 (the S&P500 closed the day at around 1453).
What does the spread index show now? Surprisingly, despite a significant drop in the S&P500 (11.5% from the high) in October 2018, the spread index does not indicate a deteriorationof the situation. It has not yet reached even 4%. In normal language it means the current fall will not have a serious continuation, and in the near future the growth of the S&P500 index will resume.
Another important indicator that reflects the mood in the economy is the truck market. Heavy trucks are an investment product, and if the demand for them is growing steadily, then the economy is doing well. This is what is now observed in the truck market.
The growth rate of the truck market in October (+39%) is higher than the average annual rate (+34%), which means that sales growth is accelerating. In October, the market exceeded the mark of 25,000 heavy trucks, which hasn’t happened often in history.
Thus, a number of signs indicate that the current decline in the US stock indices is a temporary phenomenon.