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The overall trajectory of the U.S. economy appears stable, following a brief and sharp downturn in June. This assessment is supported by a market-based evaluation of macroeconomic conditions. On August 22, the Macro-Markets Risk Index (MMRI) stood at 10.1%, indicating that business cycle risks are currently low. This figure is significantly above the critical threshold of 0%. A drop below this mark would signal an increased likelihood of recession, whereas values above 0% suggest economic expansion.
Initial jobless claims rose last week by 13,000 to a seasonally adjusted total of 336,000. However, this increase does not negate the ongoing downward trend in new unemployment benefit filings observed in recent months. This leading indicator suggests that the labor market is likely to continue its moderate expansion, which bodes well for the overall economy. Today’s report offers no data that counters this optimistic outlook, despite the skepticism some may express in light of the new figures.
How can you determine if the stock market (or any asset class) is overvalued and poised for a downturn? The definitive answer often becomes clear only a year or two later. However, making real-time assessments is much more complicated. While various techniques exist for estimating expected returns, one straightforward metric worth considering is trailing return. This method is not without its flaws and comes with its own set of caveats, but it provides a helpful foundation for assessing whether something is overvalued or not.
Barry Ritholtz from The Big Picture highlights that much of the media attention surrounding the monthly payroll report can be misplaced. He states, “The jobs report is overrated… it’s meaningless.” Instead, he emphasizes the importance of focusing on long-term trends: whether the economy is generating jobs, wage growth, and their implications for inflation.
Data released indicates that the U.S. economy continued to grow in July, albeit at a pace considered “below its historical trend,” according to the latest update from The Chicago Fed National Activity Index. The CFNAI’s three-month moving average improved to –0.15 in July from –0.24 in June, marking the fifth consecutive reading below zero. This slight advancement aligns with my previous econometric projections and is the highest level since February.
The Book of Matthew proclaims that the last shall be first, and the first shall be last. Investors might interpret this as a representation of the ongoing rotation among asset classes, a reality that is evident in this year’s market dynamics.
According to The Capital Spectator’s econometric forecast, the three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to hold steady at -0.26 in tomorrow’s update for July. Values below -0.70 suggest an “increasing likelihood” that a recession has begun, based on guidelines from the Chicago Fed. Present estimates indicate that CFNAI’s three-month average will remain at a level typically associated with economic expansion, albeit at a subpar rate, in the report due for release on Tuesday, August 20.
Business cycle risk is currently deemed low, as highlighted in the July updates of the Economic Trend Index (ETI) and the Momentum Index (EMI). Both indices, which encompass 14 economic and financial indicators, show values well above their respective danger levels. This strengthens the likelihood that the NBER will not classify July as the onset of a new recession, based on the latest data.
August is often viewed as a leisurely month, and we’re no exception. The Capital Spectator will take a brief break for the remainder of the week and will resume operations on Monday, August 19, with our usual updates. Cheers!
