US Economy and Stock Market Health - A Trend Analysis

Unit trust investors, especially those whom have a significant amount invested in the long run, should always be on a lookout for potential signs/indications of what may look like an impending market crash. Over the countless blog post which I have shared, I have always advised mid and long term Unit Trust investors to be always be on the look out for key market and economic indicators that may significantly impact your portfolio. 

It is always good to keep track of indicators of the global equity market (represented by the United States) as well as the indicators of individuals countries that your unit trust fund that may have exposure to. Therefore in this post, I will be sharing some trend analysis of the world biggest equity market (US) based on the data that I have accumulated. 

Background

Over the past two years, I have been monitoring key indicators of the world biggest economy (United States) in order to detect any trends that may indicate a potential recession. There are 3 key components consisting of 9 indicators which I believe will impact the condition of the world largest stock market (Bear or Bull). The 9 indicators are as per below:

1. Stock Market Indicators
• Shiller Cape
• S&P 500 - 12 Months Trailing PE
• S&P 500 - EPS
2. Investor Sentiment Indicators
• VIX Indicator
• NYSE Breadth Indicator
• American Association of Individual Investors Sentiment Survey
3. Economic Indicators
• Manufacturing PMI
• Services PMI
• Unemployment Rate

Each of the three components represents the stability/sentiment/condition of the US stock market over different time horizons. This is how I would like to summarize what each component represents:

• The "Investor Sentiment Indicators" represent the condition/sentiment of the stock market over the range of Days and Weeks. In other words, these indicators represent the emotion of investors towards the stock market.
• The "Stock Market Indicators" represent the condition/sentiment of the stock market over the range of Months to Years (1-4 Years). This represents the value of the stocks listed in the stock market.
• The "Economic Indicators" represent the condition/sentiments of the stock market over the range of Years (5 years and above). This is the strongest trigger that would influence the actual condition of the stock market. Economic Data are the most powerful indicators that many fundamental investors tend to use to predict or even to confirm an actual bear or bull market.

The Analysis

I intend to make this analysis a very simple one as well as to point out how data of these indicators have changed over the past two years.  First let us take a look at details we captured

Date Captured on 25th of July 2017:

Observation: 

• The "Stock Market Indicators" are already Overvalued since 2017.
• However Investors are still Bullish of the Stock Market
• The "Economic Indicators" are showing that the US economy is in best of health. 

Date Captured on 15th of February 2018:

Observation: 

• Investors are showing some uncertainties but majority are still Bullish. 
• The "Stock Market Indicators" continue to be Overvalued. Value of Shiller CAPE and EPS have risen over a period of 7 months.
• The "Economic Indicators" continue to show that the US economy is in best of health. Unemployment Rate continue to drop while Manufacturing PMI continue to rise.

Date Captured on 13th of July 2019:

Observation: 

• Investors are still Bullish. 
• The "Stock Market Indicators" continue to be Overvalued. 
• There is some cause for concern here. The "Economic Indicator" for Manufacturing and Services PMI both shown continues drop in the value. In fact the Manufacturing PMI have fallen into the Neutral zone. 

Summary

As you can see, the "Stock Market Indicators" have always been Overvalued for the past 2 years. Never the less, bullish exuberance of investors that are backed by positive economic indicators have continue to keep the stock market in a somewhat bullish state.

The most interesting observation that I hope to highlight over the past 2 years is the drop in US Manufacturing PMI and Services PMI (both are important Economic indicators). If you were to Google the definition of Manufacturing PMI and Services PMI, you would realize that if both these PMIs drop below the 50 point threshold, we are looking at potential signs that could trigger an increase in the unemployment rate (the 3rd indicator) and potentially a recession. 

My advice for the long run is to continue monitoring all these 9 indicators and watch for further signs of potential dangers and of course to follow Invest Made Easy Facebook page for future updates!

Cheers and Happy Investing to all of you!