One Of The Most Distorted Stock Markets In History
Why We Still Can’t Disregard A Potential Credit Event
If you look at the following chart for the first time without any context, what’s your first impression?
You’d probably think that economic and market conditions are pretty good. Stocks have been in a nearly uninterrupted uptrend for more than a year, which usually only happens when everything is simply clicking and everyone is optimistic again, right?
Of course, that’s the chart of the S&P 500 and Nasdaq 100 since the beginning of 2023. There’s little question that the latter part of that last statement is true. Investors have been optimistic almost to a fault and have shaken off virtually every warning sign and piece of bad news that’s been thrown at it. Is everything clicking? The major economic indicators - GDP growth, unemployment and the direction of inflation - would have you think so. GDP growth of more than 3% in the past year and an unemployment rate of less than 4% would certainly qualify as “clicking”. An inflation rate of 3% and a core inflation rate of 4% are higher than they should be, but the overall disinflationary trend has investors feeling like we’re at least heading in the right direction on that one.
So have the 31% and 61% rallies in the S&P 500 and Nasdaq 100, respectively, been justified? Many market pundits would say yes. I would say no.
If you’re trying to make an accurate assessment of economic and market conditions, you have to look at all available data, not just the ones that confirm your own beliefs. Yes, GDP growth looks strong. Yes, the unemployment rate is historically low. Those are good things, but they’re not the only things. There are several things happening in the U.S. economy right now that indicate conditions are still very vulnerable to a downturn, led by a deterioration in credit conditions that could trigger a major event. I’ve been talking about it for a while, it still hasn’t happened yet, but I believe it’s likely we’ll see it sooner rather than later.
Here are a handful of charts and graphs that support the idea that the economy isn’t as strong as it seems on the surface.
Keep reading with a 7-day free trial
Subscribe to The Lead-Lag Report to keep reading this post and get 7 days of free access to the full post archives.