Macro Environment Review and Analysis

MACRO ENVIRONMENT REVIEW AND ANALYSIS

The economy drives corporate earnings, which drives the stock market in the long term.  As a result, bull markets usually coincide with economic expansions, and big bear markets usually coincide with recessions. Since the stock market tends to peak before recessions begin, we need to look at leading economic indicators, which also deteriorate before recessions begin. This doesn’t mean that the stock market’s exact top cannot occur before macro starts to peak. This happened in January 1973, when the stock market peaked a few months before macro started to deteriorate.  However, the biggest part of bear markets always occur after macro has deteriorated significantly as shown below; 

Macro Indicators can generally grouped into one of the following categories;

• National Income and Expenditures;
• Population, Employment and Labor Markets;
• Production and Business Activity;
• Money, Banking and Finance;
• Prices;

While we monitor in excess of 30 Macro Indicators each month, we strive to provide a simple and concise overview  of the Macro Environment for our members. To assess the Weight of the Evidence through a diverse and condensed list of indicators, we have hand selected the 10 Macro Indicators below;

• Civilian Unemployment Rate (UNRATE);
• KC Fed Labor Market Conditions Index, Momentum Indicator (FRBKCLMCIM);
• Industrial Production Index (INDPRO);
• Motor Vehicle Retail Sales: Heavy Weight Trucks (HTRUCKSSAAR);
• Advance Retail Sales (RRFS);
• Housing Starts (HOUST);
• B of AML US High Yield CCC or Below Option-Adjusted Spread (BAMLH0A3HYC);
• National Financial Conditions Index Credit Subindex (NFCICREDIT);
• 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y) and;
• S&P 500 Valuations.

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MACRO INDICATOR ANALYSIS EXAMPLE

Below is an example of how we monitor and assess the Macro Indicators for future clues on market direction.

INDUSTRIAL PRODUCTION INDEX (INDPRO) – ANNUAL CHANGE
MEASURES THE RAW VOLUME OF GOODS PRODUCED FROM MANUFACTURING COMPANIES

While the Industrial Production Index resides above zero, generally the index indicates increasing industrial production and strong business activity. Therefore this would represent strong economical conditions. Large bullish trends in the S&P 500 have been correlated with the Industrial Production Index residing above zero.

While the Industrial Production Index resides below zero, generally the index indicates decreasing  industrial production and weak business activity. Therefore this would represent weak economical conditions. Corrections and bear markets in the S&P 500 have been correlated with the Industrial Production Index residing below zero.

The Industrial Production Index fell below zero in September of 2019. While the S&P 500 continued to rise into all time highs printed on February 19, 2020, as a leading indicator the Industrial Production Index provided investors advanced warning of waning economic conditions and future price volatility. This volatility was finally recognized with a -13.78% decline (measured on a closing basis) during the week of February 24th-28th, 2020.

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Below is a full list of Macro Indicators Reviewed each month by Riverside staff.  

NO	MACRO INDICATOR	CATEGORY	SUBCATEGORY
1	Initial Jobless Claims	Population, Employment and Labor Markets	Labor Conditions
2	Continued Jobless Claims	Population, Employment and Labor Markets	Labor Conditions
3	Civilian Unemployment Rate	Population, Employment and Labor Markets	Labor Conditions
4	KC Fed Labor Market Conditions Index, Momentum Indicator	Population, Employment and Labor Markets	Labor Conditions
5	All Employees: Total Non-farm Payrolls/Civilian Labor Force	Population, Employment and Labor Markets	Labor Conditions
6	Industrial Production	Production and Business Activity	Production
7	Motor Vehicle Sales: Heavy Trucks	Production and Business Activity	Sales
8	Advance Retail Sales	Production and Business Activity	Sales
9	Non-financial Corporations:Unit Profits	Production and Business Activity	Profits
10	Corporate Profits after Tax	Production and Business Activity	Profits
11	New Private Housing Units Authorized by Building Permits	Production and Business Activity	Housing and Urban Development
12	Housing starts: Total New Privately Owned Housing Units Started	Production and Business Activity	Housing and Urban Development
13	Monthly Supply of Houses	Production and Business Activity	Housing and Urban Development
14	New One Family Houses Sold	Production and Business Activity	Housing and Urban Development
15	Housing Starts: Total New Privately Owned Housing Units Started / Civilian Labor Force	Production and Business Activity	Housing and Urban Development
16	High Yield Spreads	Money, Banking and Finance	Credit Conditions
17	Financial Conditions Index	Money, Banking and Finance	Credit Conditions
18	Bank Tightening Standards	Money, Banking and Finance	Credit Conditions
19	Loan Delinquency Rates	Money, Banking and Finance	Credit Conditions
20	Yield Curve – 10-yr less 3-month	Fixed Income	Yield Curve
21	10-yr less 2-year	Fixed Income	Yield Curve
22	Price to Earnings (P/E)	Valuations	Price to Earnings
23	Shiller P/E	Valuations	Price to Earnings
24	Earnings Per Share	Valuations	Earnings
25	Reported Earnings vs Forecast	Valuations	Earnings